L2M2 Procurement and Supply Operations-2

a d
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ISBN: 978-1-86124-278-5
A CIP (Catalogue in Publication) catalogue record for this publication is available from the British Library.
All facts are correct at time of publication.
Author: Katie Jarvis-Grove FCIPS Chartered Procurement and Supply Professional
First published in 2018 by CIPS
Editorial and project management by Haremi Ltd.

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Contents
Your qualification v
Guide to qualification content vi
About our exams and your study commitments vii
How to use this book viii
Book features ix
Procurement and Supply Operations x
Chapter 1
Types of organisations and how they operate 1
Identify the types of business organisations 2

• Public, private and third sector organisations 2
• Production and service organisations 7
Describe how organisations operate 13

• People, objectives and structure in organisations 14
• The formal and informal organisation 28
Identify the key operating functions within organisations 30
• Differentiation and integration in organisations 30
• Typical functions in organisations 33
• Differentiating procurement and supply 38
Chapter 2
The components of contractual agreements 45
Identify types of contracts 46

• Spot purchases 46
• Term contracts 48
• Alternatives to spot purchases and term contracts 49
Identify the kind of pricing arrangements applied in commercial contracts 53

• Fixed pricing 55
• Lump-sum pricing 57
• Schedule of rates 58
• Cost reimbursable or cost plus arrangements 59
• Variable-pricing arrangements 61
• Target-pricing arrangements 62
• Risk-and-reward-pricing arrangements 63
iii
Contents - - - - -- - -- -- - - - - - - - - - - - - - - -- -- -- - -- - - - -
Define the different documents that compose a contract for the purchase or supply of
goods or services 65
• Defining contracts and agreements 65
• The use of tendering and quotations 70
• The documents that comprise a contract 74
• Contracts for the supply of goods or services 79
Chapter 3
0 Sources of information on suppliers and customers 81
Explain the use of the Internet to locate details about suppliers and customers 82
• The use of Internet search engines to locate details about suppliers and customers 82
• The types of information presented by suppliers and customers on their websites 87
• B2B and B2C e-commerce 88
Explain the use of credit rating agencies 90

• The role of credit rating agencies and credit rating scores 90
• Publications on individual organisations and markets 93
• The use of credit rating scores 98
Describe systems used in procurement and supply 98

• Systems for purchase ordering 99
• Capturing data on expenditure 101
• The use of portal sites to locate suppliers or customers 102
• Examples of supplier database systems 107
Chapter 4
e Pricing methods used for the purchasing of goods or services 111
Explain the advantages and disadvantages of a range of pricing methods 112

• Fixed pricing 11 2
• Lump-sum pricing 114
• Schedule of rates 116
• Cost-reimbursable or cost-plus pricing arrangements 118
• Variable pricing 119
• Target pricing 120
• Risk-and-reward pricing 121
• Advantages and disadva ntages of the various pricing methods 122
Glossary 127
Index 149
iv
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Y o u r qualification
Your
qualiflcation
CIPS qualifications are regulated internationally to ensure we offer a recognised, professional
standard in procurement and supply. CIPS Level 2* Certificate in Procurement and Supply
Operations is a vocationally related professional qualification. Formal recognition is included within
the regulatory frameworks of an increasing number of countries such as the UK (England, Wales
and Northern Ireland), UAE (including Dubai) and Africa (including Zambia). Further information
on this recognition and the details of corresponding qualifications levels for other international
qualifications frameworks are detailed on our website. CIPS members can have the confidence
in our regulated qualifications, which reliably indicate the standard of knowledge, skills and
understanding that you, as a learner, are required to demonstrate.
This is the first of CIPS entry level qualifications and is Developed in close collaboration with experts from the
suitable for those who want to specialise in a specific procurement and supply profession and businesses, and with
occupation, occupational area or technical role. It will the providers who will be delivering the qualifications, CIPS
prepare learners for work by giving them the opportunity Level 2 Certificate in Procurement and Supply Operations is
to develop sector-specific knowledge, technical and designed to develop transferable workplace skills, such as
practical skills, and to apply these skills in work-related good communication and the ability to work in a team; skills
environments. This qualification supports !earners which employers have identified as essential for gaining
within operational roles within the procurement employment in the sector and for progression in
and supply profession. the profession.
Enf:rylevei Entry !eve! Nighest Entry level
-Ne~-~~:;s---------------------------------------------------------------------1
--- ------------" - ---------- -- --- - - - - --------------- - I

This qualification also provides progression to the CIPS Leve! 3 ,,I
Advanced Certificate in Procurement and Operations,

or CIPS Level 4 Diploma in Procurement and Supply, i
depending on your knowledge and experience. I
------------------------------···-----------------------~---------J
•· Refers to levels within the UK RQF. Other regulotory bodies may have different corresponding levels
Based on the Tactical competency level of CJPS Global Standard
v
Guide to qualification
content
Five CORE modules make up the required 18 credits
···········-------·--··-----·-------------------·· ··········-------------------··-------------···········--------·-------------··-.. ·-------·-········-.. ·--·.
''
'
'''
.'
'
' ''
. . . . ' '
CORE Procurement and • CORE Stakeholder · •

Supply Operations (L2M2) .· Relati?~ihips (L2M3)
. . •. . '. • . CREDITS
. ;,~ . ... . ,.. '
CREDITS
'
. -
CORE Inventory, Logistics •
and Expediting (L2M5)
•. • . . CREDITS
- l • , . • . •
........................................................................................................................................................................................................................ ,'
Who is it for?
For anyone new to the profession, with little or no business experience and those aspiring to move into a
career in procurement and supply.
It is also ideal for managers in other professions and business leaders or entrepreneurs who need to
understand how procurement should function and its overall impact on business success.
What will I learn?

·--------~--·-·--··-------·---·--·--·----~----·--·----- - ·~-·---- ...
Come away with a clear knowledge and understanding of facts, procedures and processes related to
procurement and supply. You'll be able to effectively interpret information and ideas, and learn how to identify,
gather and use relevant information.
Entry requirements
This is the first entry level qualification, there are no formal entry requirements.
Credit values
To gain a qualification you are required to complete a total number of credits. This is a way of quantifying the
required number of study hours. 1 credit is equivalent to 10 hours of study.
Each module is given a credit value of 3 or 6 credits.
Total credits required for completion 18
vi
1 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - A b o u t our exams and your study commitments
About our
exams and your
study commitments
Objective Response exam format (OR)
These questions allow you to select a response from a list of possible answers.
You will find these types of exams across all our qualifications levels and they
are marked by computer and then moderated by CIPS examlners.
Your total qualification time (TQT)
The TQT indicates the overall number of guided learning hours,

additional self-study and assessment time that is required.
Guided learning hours (GLH)
It is expected that you wi!I undertake 120 GLH. The definition of guided learning
hours is: 'A measure of the amount of input time required to achieve the
qualification. This includes lectures, tutorials and practicals, as well as
supervised study in, for example, learning centres and workshops'.
Self-study requirement (SSR)
Additional!y, we recommend that you also commit to at least [54 SSR]

hours. This includes wider reading of the subject areas and revision to give
yourself the best preparation for successfully achieving the qualification.
Total exam time
All the modules in CIPS qualifications are assessed by an examination.
vii
How to use this book - -- - -- - - - -- - - -- - -- - -- - - - - - - -- - -- -
How to use this book

Welcome to this study guide for Procurement and Supply Operations. It conta ins
all the information needed to prepare you for the assessment in this module.
This study guide follows the order of the module specification and each chapter
relates to one of the learning outcomes below. You can also see the assessment
criteria for each learning outcome.
Learning After completing this chapter you will know the

types of organisations and how they operate.
outcome
Learning By the end of this chapter, you will know the

components of contractual agreements.
outcome
Learning After completing this chapter you will understand

sources of information on suppliers and customers.
outcome
After completing this chapter you w ill understa nd

Learning the advantages and disadvantages of a range of
outcome pricing methods used in procurement.
viii
Book features
Throughout this book there are a number of features to aid your learning and simplify
your revision. Take a look at the different features you will find in the book below.
information is important, so you should make a note of it.
These are the key

terms and their
definitions.
These case studies will relate the content you have

learned to real-world examples.
Recommended reading
These books can give you more understanding on the subject.
Link to CIPS knowledge where members will be

able to access additional resources to extend your
knowledge, plus links to online elearning content
including videos, audio and interactive quizzes to
recap and test your knowledge and understanding.
End of chapter assessments

At the end of each chapter in the book there is a set of exam-style questions to prepare
you for your assessment.
End of Chapter Assessment

The National Health Service (NHS) in the UK is an example of an
organisation from which sector?
a. Public c. Third
b. Private d. Primary
ix
Procurement
and Supply
Operations
{L2M2}
Module purpose
On completion of the module, learners will be able to identify types of business
organisations. They will define the fundamentals and components of the contracting
process, identify sources of information on suppliers and customers and define pricing
methods used for the purchasing of goods or services.
Module aim(s)
In any organisation, a significant element of the procurement and supply function is
based around the contracting process. This module is designed for those involved in the
procurement and supply operation who, to ensure success must demonstrate knowledge
and comprehension of the associated components and systems that are at their disposal
to support the contracting process. They must also know where sources of information on
suppliers and customers are and recognise the advantages and disadvantages of pricing
methods used for the purchasing of goods or services.
3
CRF.DITS
Credit value
MODULE
LEARNING TIME
CIPSGLOBAL
STANDARD
4.2 6.1
x
CHAPTER 1
After completing this chapter you will know the

types of organisations and how they operate.
Chapter overview
Identify the types of business organisations
You will understand:
• Public, private and third sector organisations
• Production and service organisations
Describe how organisations operate
• People, objectives and structure in organisations
• The formal and informal organisation
Identify the key operating functions within organisations
• Differentiation and integration in organisations
• Typical functions in organisations such as production, operations,
marketing, sales, customer support, human resources, personnel,
finance, IT, and technical functions
• Differentiating procurement and supply
Introduction
In this chapter you will learn about the different types of organisations, how
they operate, how they are funded and what is important to each organisation.
Organisations are run in a variety of ways depending on their owners, how they get
their money and who their customers are. The people, objectives and structures
within the organisation are very important to how it runs. You will look in detail at
different types of people, their personalities, strengths and weaknesses, and how
they work within the organisation. You will also understand the objectives that
organisations have and the structures that are formed within them.
Organisations often have many departments. Each is responsible for different
things within the business. Their different roles and how they work together
towards a common goal will be explained in detail.
Finally, you will learn about the main differences between procurement and supply.
1
CHAPTER 1 Types of organisations and how they operate - -- -- - -- - - - -- - - - -- - - - --
f) ldenti~ t~e types of business

organ1sat1ons
Economy The economy is made up of several types of businesses: public sector, private
The state of money sector and third sector organisations.
flow, manufacturing,
distribution, Business organisations come in many forms. Different sorts of organisations
availability and are needed for different industries. Some businesses get their money from
consumption, or
governments, some from their owners or people who have invested money in
scarcity, of goods
and services, energy, them, and others from the public. Some are not funded at all but are formed as a
labour, or other body to help others without generating a profit for themselves. Such businesses
resources at country often cover their costs by private investments or donations from the public.
level
Public, private and third sector

organisations
We will now consider the differences between organisations belonging to
different sectors.
Public sector organisations

Public sector organisations are owned and run by governments. These
organisations provide the general public with a service that is very important t o
their wellbeing and daily lives. Public sector organisations are based on serving
the people. Some examples are shown in table 1.1.
Public sector
Service Example
organisation
Universal healthcare
systems in Singapore,
Universal health care Doctors and hosp itals Brunei, Darussalam, China
The National Health
Service (NHS) in the UK
Guildford County School
Education Schools and colleges and Riseholme Agricultural
College in the UK
Royal Air Force (RAF) in
the UK, ROCAF (Republic
Military Army, navy, air force of China Air Force),
Australian Defence Force
(ADF)
The South African Police
Police, ambulance service, Service, the New York
Emergency services
fire service City Fire Department in
the US
Public libraries, refuse The Mitchell Library in
Municipal services
collection Scotland
Table 1. 1 Public sector services
2
- - - - - - - - - - - - - - - - - - - - - - - - C H A P T E R 1 Types of organisations and how they operate
So how do public sector organisations get their money? Governments charge

citizens taxes and levies in their everyday lives that go towards the running of
these organisations. People who go to work have to pay taxes on their salaries.
When you go shopping and buy certain items you will pay tax on top of the price
of the goods. These taxes go to the government and contribute towards the
running of the key services that everyone needs.
You will no doubt have heard discussions or seen news reports about the tax on
petrol or diesel, tobacco and alcohol. These products feature heavily in the budget
each year and give the government a lot of income from taxes.
People who work for the public sector get their salaries from the money that the
citizens contribute, and salaries are often more regulated than private sector ones.
Employees within the public sector receive their salaries according to the scale
the government sets out for a particular role. There is no flexibility for pay rises as
they are already agreed with the government.
Public sector organisations are often quite restrictive. They are governed by a lot
of rules and regulations that must be followed. Because the public pay for the
public sector they show a lot of interest in these organisations to ensure services
are run to a high standard. As the public want to make sure that
they are getting value for money. If, for example, a new hospital is being built, it is Anyone with an
interest, or stake, in
important that the buyers source the materials for the best price.
the organisation or
Figure 1.1 shows all stakeholders (interested parties) that could be involved in a project
public sector project, i.e. if a new hospital were to be built.
Communities Communities
of place of interest
Schools, colleges, Community

organisations
lifelong learning
and societies
Voluntary
Cultural and
organisations
leisure services
and charities
Health and
wellbeing NG Os
agencies
Regional/
national Social
government enterprises
Local authorities,
strategic bodies Businesses
Figure 1.1 Stakeholders in the public sector (Source: www.publicengagement.ac.uk)
3
CHAPTER 1 Types of organisations and how they operate~----------------------
Remember
Private sector businesses can be in different forms.
• Sole trader
• Partnership
• Private limited company (Ltd)
• Public limited company (Pie)
Third sector organisations

Third sector organisations, often known as TSOs, are businesses that are not in the
public or private sector. Unlike private sector businesses, third sector organisat ions
are not aiming to make a profit. TSOs are often funded privately, by investors or the
public. Voluntary and community organisations are third sector businesses.
TSOs are often independent of the government and are driven by their wish to do
good, succeed and share a common interest. TSOs are often linked to improving
socia l situations, welfare or ethical behaviour.
TSOs are often known as not-for-profit organisations. Charities can be referred
to as TSOs. Third sector organisations are formed to benefit the community and
enrich society.
TSOs have va lues that are quite different from private or public sector
organ isations. These values help to define their key characteristics. These are
shown in table 1.2.
Goals
• To provide improvement to their chosen area of society
Inclusion
• All stakeholders are listened to and involved
Speed
• Processes often take longer than in a public or private sector organisation as
everyone is involved
Resource
• Limited skillset depending on people involved
Budget
• Low budget which is dependent on donations and investments
Feel
• The atmosphere is often more relaxed as everyone is like-minded and the
end goals are shared
Table 1.2 TSO values and characteristics
People working for third sector organisations do not always receive a salary. This
Expenses
Costs incurred from depends on the set up of the business and the arrangement with the individuals.
travelling, staying in Workers are often vo lunteers or simply get their expenses paid.
hotels, eating out,
etc. whilst carrying If a TSO makes a profit or generates a lot of income, which is more than the
out your job break even point, they reinvest the money for the be nefit of the organisation.
Break even TSOs generally refer to profit as a 'surplus'.
The point at which These are examples of third sector organ isations.
a business recovers
what it has spent • Cancer Resea rch UK
and starts to make a
profit • WWF (The World Wide Fund for Nature)
6
• Greenpeace
• Amnesty International
Co-operatives can be TSOs. These are organisations that are formed to help each
other. The members are the owners of the co-operative and all share common
goals and want the same things. Co-operatives have no big investors and every
member has a fair chance to say what they think is best for the business. They are
actively involved in all decisions and everyone is listened to. The money made is
not for profit, but goes back to the members or the local community, or is invested
into further developing the co-operative.
These are examples of co-operatives.
The Co-operative Bank in the UK
• Co-op Kobe, the largest retail co-operative in Japan
• The Indian Farmer's Fertiliser Cooperative (IFFCO)
The Mwalimu Cooperative Savings and Credit Society Limited in Kenya
Differences between the three sectors

Table 1.3 shows the main differences between the three sectors.
Owned by Government Private investors Public

Funded Taxes, levies Investment, loans Donations
Shares? No Yes No
Float shares? No Yes No
Objectives Help citizens Make a profit Do good
Internally
Government Own business Volunteers
legislated by
job security, Good salaries,
Benefits Helping the cause
pension bonuses
Table 1.3 Differences between sectors
Organisations always supply something to someone. They are responding to a need

from their client. The need may be to acquire something physical (a product) or
have something done (a service).
There are two main types of organisations within business: production and service.
Production organisations provide a product, something you can see and touch, and
service organisations provide a service, something you cannot physically touch.
Remember
Production organisations provide a product, something you
can see or touch, and service organisations provide a service,
something you cannot physically touch.
7
CHAPTER 1 Types of organisations and how they operate---- -- -- - -- -- -- -- - - - - - -
Things you can touch and see are referred to as tangible items, and things you
cannot see and touch are known as intangible.
Here are some examples of tangible items an organisation could supply.
Tangible
• Books
Something you
cannot physically see • Engines
or touch
• Computers
Intangible
Something you • Food
cannot physically see
or touch These are examples of intangible items an organisation could supp ly.
• Cleaning service
• Electricity supply
• Insurance
• Business consultancy
Public sector organisations mainly supp ly intangible items, or services, such as
the following.
• Education
• Medical treatment
• Social housing, i.e. paying rent on homes for those in need
Although what the business provides is intangible, we can see the end product.
For example, if a public sector business builds a new road, the end product is
tangible although the labour involved in building the road is intangible.
Private sector organisations' offerings are both tangible and intangible as they
make products and supply services. Examples of products a private sector will
supply that are tangible are as follows.
• Clothing
• Cars
• Jewellery
• Stationery
These are examples of intangible offerings a private sector company could supply.
• Downloadable music
• Smartphone applications
• Teaching a student how to do procurement
TSOs usually dedicate themselves to helping a cause. They are normally
service-based and hence offer intangible products.
These are examples of services that a TSO supplies.
• An imal rescue
• Food banks
• Community care for the underprivileged
Check
Which of these are tangible and which are intangible:
• Food
• Electricity
• Shoes
• Fire service
8
: - - - - - - - - - - - - - - - - - - - - - - - - C H A P T E R 1 Types of organisations and how they operate
Production organisations
Organisations that are production businesses are also known as manufacturers.
Manufacturing businesses are very different from service organisations. In the
following paragraphs you will learn what a production organisation is and how
it functions.
Production organisations have to think about lots of different things so they can
successfully make goods and sell them to the market.
Considerations of a production organisation

Market leader Apple designs, develops and sells
consumer electronics, computer software and online
services. To remain successful Apple has to make sure
that the products it manufactures are better than
those of its competitors and that it can release its new
products to retailers before anyone else.
Big companies such as Apple have a global presence and
need to take into account the needs of their consumers
all over the world. Their design has to work and be
appealing for everyone, regardless of what country they
live in. Thus they have to think about the style, colour,
size, shape, weight and function of their devices.
Apple have to make sure that any new devices they
launch are ready by the release date and therefore have
to have trust that their production team will meet their
objectives and that the procurement team will supply all
the components needed.
A production organisation like Apple has to succeed in
delivering promises to its consumers if it is to maintain
its global status as a market leader.
The basic manufacturing process

Figure 1.2 shows how the manufacturing process works.
Production organisation receives an order
Procurement team order the raw materials
Raw materials are received and booked to inventory
t
Staff receive training on how to manufacture the order correctly and on the lead time I
t
Products are manufactured (this could include many processes and people) I
t
Products are checked for good quality
I
Products are put into stores or sent to customers
I
Figure 1.2 Manufacturing process flow
9
CHAPTER 1 Types of organisations and how they operate-- - -- - - -- - - -- - -- - - - - - --
Within a production organisation there will be a sales team (which we will cover in
more detail later in the book) who will win or take an order from the customer. The
order will then be entered into the organisation's system, and the procurement
team, or buyers, will be instructed to order in the materials needed to do the job.
For example, if this production organisation is manufacturing books, then the
buyers will need to order enough paper for the book to be printed on and enough
ink to print the content.
When received, the paper and ink will be logged on a system so that the
organisation knows how much stock they have and that they have the right
amount to complete the order.
Shop floor The staff on the shop floor will be advised of the order and will start to print
Within the book.
manufacturing, the
area where the goods Once some copies are printed the quality control department will check the
are made finished product and make sure it is exactly how the customer has asked it to be.
Quality control Once quality control has approved the book, production will continue until the
Checking a product order is complete.
against a set of
criteria to ensure Once all the books are printed and packed they will be delivered to the customer.
it meets quality
standards Now the production organisation is ready to start on another order.
Patented Production organisations often manufacture large quantities of goods as it costs

The inventor has less money to do this than make the same thing lots of times. The products the
been legally granted organisation makes can be kept in the stores and called off when a customer
exclusive rights to
wants them .
make or sell their
idea or invention Products made by production organisations are often specific to that company.
The designs of manufactured items can be patented so they cannot be copied by
anoth er business.
Production organisations often have more staff than service organisations. This is
because the processes involved in making or manufacturing a product are often
complex and need a variety of skills. It is unlikely that one person will be able to
complete the whole manufacturing process, whereas in a service organisation, it is
often possible for one person to deliver the service.
Service organisations
Inventory Service organisations do not hold inventory in the sa me way that manufacturing
The stock of goods, organisations do. They react to the needs of their customers. The customer can
materials or products either contact the service organisation when they have a need, or they can arrange
an agreement so the organisation meets that need as or before it arises. Figure
1.3 shows this process within a service organisation.
Service organisation receives a

call from a customer
Service organisation reacts to the

call and arranges to deliver the service
The service Is undertaken for

the customer
Figure 1.3 Process flow in service organisations

10
-----------------------~CHAPTER 1 Types of organisations and how they operate
An example of a customer having a need and contacting a service organisation

is where a man visits a barber's shop (who could be a sole trader) to have his
hair cut. Once he has received his haircut he leaves and another customer
takes his place.
An example of an agreement whereby an organisation meets a need before it
arises is where a limited company provides a grass cutting service to an office's
garden once a week before the grass has a chance to get too long.
Unlike production organisations, that often produce large volumes of the same
thing, service organisation's services are more Clients of services often Be~;;poke
have unique needs and requirements. Consider the example above of the barber's Made or provided
shop. The hairstyling requirements of a teenager may not be the same as those of especially for a
specific end user
a retired person, so the barber's offering has to change to suit these various needs.
An example of bespoke services

A company that manufactures bicycles, Pedal Power
Ltd, is looking to source a window cleaner to clean the
windows once a month.
Pedal Power Ltd owns a long, single-storey building that has
lots of windows, some of which are very difficult to access.
The window cleaner must provide them with a quotation
for the service. The window cleaner must be able to
provide hoses long enough to reach from the one outside
tap at the far end of the building to all the windows.
Potential suppliers would have to visit the site and
look at what was required. It is unlikely that any other
business would have the exact same requirements, so
Pedal Power Ltd would require a bespoke service.
Location of organisations
The location and premises of an organisation are important. The building in
which the organisation is located must be big enough for the machinery needed
as well as to house the workforce comfortably. Production organisations,
in particular, must think carefully about the following issues in terms of the
building's location.
• Travel connections
• Local environment
The type, age,

• Security culture, interests and
financial position of
• Competition
people
Expansion
The owner of a production organisation must consider the road and rail network,
and potentially the airport and port connections, near their premises. If the
location is remote and there are no good travel connections to where the end
product is going, the business could fail.
Aside from goods leaving, incoming deliveries and workers need to be able to
easily access the site.
CHAPTER 1 Types of organisations and how they operate-- - -- - -- -- - -- - - - -- -- -- - -
If the organisation is a service then the owner must consider car parking for its
clients. It would not make sense to have a laundrette, for example, in a location
in which there is nowhere for the customers to park their cars whi le they wash
their clothes.
Most organisations will generate some waste and pollution. The owner must
consider what impact this may have on the environment when looking at a site. If
the business produces a lot of smoke, or a bad smell, then a good location wou ld
not be in the middle of an urban area, near a school or in an area of natural
beauty, for example. It would make sense to consider an industrial park where
businesses are already generating waste and pollution. Th is wou ld be more of a
natural fit for the organisation and not upset local residents as much.
Selecting a location for a production organisation

A small business that manufactures chicken burgers has
just won a contract to supply a leading supermarket.
Kickin' Ch icken Pie currently owns a building in the
middle of a sma ll town . Due to the contract they won,
their output will triple.
Local residents are not happy about this. For the last
twenty years, they have put up with the smell of chicken
because the business only manufactured two days a
week. The upscale in busi ness means that they will now
be manufacturing six days a week.
The residents and other local businesses prepared a
petition and submitted it to the local council.
After much consideration Kickin' Chicken Pie decided
to listen to its external stakehold ers and relocate the
factory. They sold the current site to a small IT company
who planned to completely refit the bu ilding to make it
suitable for their needs. Their business offers a drop-in
service for local people to have their computers fixed, so
the location was idea l.
Kickin' Ch icken Pie took out a lease at a factory on
an industrial estate on the outskirts of town that has
previously been producing ready made meals. The
new location worked for Kickin' Chicken Pie as the
road network was much better for getting deliveries in
and sending products out. There were no resident ial
dwellings in the area so nobody would be upset by the
smell produced.
It is also important to consider demographics in order to employ the right people

in the organisation and attract the right customers. If, for example, a production
organisation needed fit people to work in their business, who were required to do
heavy manual labour, it would not make sense to locate the business in an area
that attracted people of retirement age. If a service organisation, such as a lawn
mowing service, was to locate where residents lived in high-rise flats, this wou ld
not be practical as potentia l clients would not have gard ens to mow.
If the organisation wanted to attract wealthy customers and t he business was
open to customers to drop in and make a purchase from t heir shop, i.e. luxury
chocolates, the location of the business wou ld need to be somewhere affluent.
12
If there was competition from a similar organisation in the area, it would be

worthwhile looking at alternatives. An organisation may not do well if it had a
similar, successful business next door or close by as it would have to compete for
clients. For example, having several service organisations that fixed smartphones
in the same street would not make good business sense.
Finally, the owner would need to think about the possibility of the business doing
well and needing to expand. If this happened the site may need to be extended
and more people employed. The owner would need to assess whether there was
room to expand the site and if there were enough people locally to employ to
meet those plans.
Differences between production and service

organisations
Table 1.4 shows the main differences between production and service organisations.
Remember
~;'J:Fft~~i;~ll?n£9f!l~~1~~t\Q'f!~~g
Make/manufacture Provide a service
something
Offer tangible products Offer intangible services
Have inventory Don't have inventory
Often produce large volumes Services are often bespoke
of standard products
Goods are produced before Services are provided as they
they are consumed are needed
Quality is easily measurable Quality is harder to measure
Manufactured goods can be Services are easy to copy
patented
Table 1.4 Differences between production and service organisations
Describe how organisations

operate
As you have learned in section 1.1, there are three main types of organisation
that are very different from one another. Some businesses make things and some
provide services. Some businesses are owned by private individuals or investors
and some by the government. Taking this into account, it is easy to see why
organisations need different types of people, and have a variety of structures and
objectives that are relevant to them.
Organisations can also be formal or informal, so this section will also cover what
drives an organisation to make that decision and the differences between the
chosen styles.
13
CHAPTER 1 Types of organisations and how they operate-- -- - - -- - - -- -- -- - - -- - - -
People, objectives and structure

in organisations
Organisations are usually made up of two or more people - with the exception, of
course, of sole traders. These people all have a common goal and want to achieve
the same results.
Within an organisation there are many roles and a variety of structures. You will
learn about structures later in this chapter. As the roles within an organisation
vary, so will the characteristics of the people needed to do them.
People in organisations
Consider all the different jobs within a business as follows.
• Managing director/C EO: Has overall responsibility fo r the strategy and decision
making within an organisation.
• Directors: Reporting to the CEO, the directors lead and specialise in specific
areas, e.g., procurement director.
• Senior managers: Reporting to the directors, senior managers have t he
responsibility of planning and directing the work of a group of individuals,
e.g., senior procurement manager.
• Managers: Reporting to the senior managers, they are also responsible for
planning and directing work of a team of individuals but with slightly less
authority than the seni or managers, e.g., sourcing manager.
• Team leaders: Reporting to the manager, t hey provide guidance to their team
and are the first area of escalation should there be a problem, e.g., head buyer.
• Supervisors: Reporting to the team leader, a supervisor is responsible for t he
day-to-day operations within their department. They ensure work is actioned,
e.g., buying office administration manager.
• Operatives: Individuals carrying out the day-to-day operations within an
organisation, e.g., expeditor.
• Apprentices: An inexperienced individual training on the job to develop the
skills required, e.g., apprentice buyer.
Each of these roles needs a different set of skills and a different level of
understanding or experience of the relevant industry.
They must work together as a team as each person within an organisation wants
the same results.
An organisation that is performing well is likely to employ a good range of people, all
complementing each other. The team as a whole will provide all the skills needed.
Motivating people in organisations

Motivation is created from internal and external factors that stimu late an
individual to want to do their work within an organisation. Motivation helps to
ensure an individual is committed to the aims of the organisation, energetic and
focused on delivering results.
In order for people to be motivated to go to work and to work hard, t hey must
have their basic needs m et. In a research paper in 1943 and a book in 1954, an
American psychologist called Maslow produced a theory about people's needs.
This work is commonly known as the Hierarchy of Needs.
14
Safety needs
protection, security, order, law, limits, stability, etc.
Biological and Physiological needs

basic life needs - air, food, drink, shelter, warmth, sex, sleep, etc.
Figure 1.4 Mas/ow's Hierarchy of Needs (Source:© design Alan Chapman 2001-7,
based on Maslow's Hierarchy of Needs)
Figure 1.4 shows how basic needs must be met before the next level of needs can
be achieved. So, basic needs such as air to breath, food to eat and shelter from
the elements must be met in order to survive. Without these needs being met it is
highly unlikely that anyone would be motivated to achieve the next level.
Once people have the first level of needs met, they will naturally want the next tier.
People will seek protection, stability and order in their life to achieve wellbeing.
Once they have all their needs met in the second tier, a person will seek a
relationship for companionship, affection and social activity.
Now as they move to tier four, they will be motivated to gain achievement,
responsibility and a good reputation. This will motivate them to do well in their
chosen job. And so the diagram continues.
Finally, if a person has their needs met in the first four tiers, then they achieve
personal growth and fulfilment. This is when they are highly motivated and likely
to achieve their goals.
If, at any point, one of the tiers is not met, i.e. a person's relationship fails or they
suffer poor health, their motivation for the levels above is likely to be lower. In
an ideal situation, according to Maslow, all these areas need to be fulfilled for a
person to have maximum motivation and hence achieve what they want to.
As we are learning, motivation is very important for people to achieve and
perform well in their jobs.
15
CHAPTER 1 Types of organisations and how they operate - - - - - -- - -- -- - - - - - -- - - ---------"
There is a theory developed by Herzberg (Herzberg et al., 1959) t hat tries to

demonstrate the things that motivate people w it hin their team s and workplace.
From research, Herzberg discovered there were two main factors involved in
influencing workers that helped them to achieve job satisfaction.
1. Motivation factors
2. Hygien e factors
Motivati on facto rs are shown in table 1.5.
Challenging work
• Is the person being pushed to do their best or are they bored?
Recognition
• Does the manager tell the worker when they do a good j ob?
Involvement
• Is the person involved in decision making, t eam work and business decisions?
Responsibility
• Does the person have some resp onsibility to make them feel valued?
Table 1.5 Motivation fa ctors
Hygiene factors are shown in table 1.6.
Working conditions
• Is t he office warm in the w inter and cool in the summer? Are t he toilets clean?
Company policy
• Does t he company look after the worker? Do they get holiday or sickness pay?
Relationships
• Do the workers interact and involve each other in conversations?
Table 1.6 Hygiene f actors
Based on Herzberg's theory, there are four possible situations a person could
experi ence in t heir role. These are shown in figure 1.5.
Few complaints, Ideal situation

High but people just where people
work for money have no worries
OJ
c:
OJ
·~
I Lots of motivation
but also many
Lots of complaints, complaint s. People
Low no motivation like their job, but
and poor cond itions the money is not
good or conditions
are bad
Low High
Mot ivat ion
Figure 1.5 Herzberg's situations
16
! - - - - - - - - - - - - - - - - - - - - - - - - C H A P T E R 1 Types of organisations and how they operate
Now you understand what motivates people and what they need in order to be
happy and do a good job.
People in teams
Teams are designed to get the best results and make sure that people work well
together. It is therefore very important that teams include the right people, with
the right skills, and people who are motivated to do the tasks.
A theorist called Belbin undertook some research with his colleagues at Henley
Management College to try to understand and document what makes a team
function well.
His research showed that good teams have lots of different personality types in
them and that each of these types has different characteristics and strengths and
weaknesses.
Table 1.7 explains the different roles people can play in a team depending on
their characteristics.
Might be over-optimistic, and can lose

Outgoing, enthusiastic. Explores
Resource Investigator interest once the initial enthusiasm has
opportunities and develops contacts
passed
Co-operative, perceptive and Can be indecisive in crunch situations
Teamworker
diplomatic. Listens and averts friction and tends to avoid confrontation
Mature, confident, identifies talent. Can be seen as manipulative and might
Co-ordinator
Clarifies goals. Delegates effectively offload their own share of the work
Creative, imaginative, free-thinking. Might ignore incidentals, and may be
Plant Generates ideas and solves difficult too pre-occupied to communicate
problems effectively
Sober, strategic and discerning. Sees all Sometimes lacks the drive and ability to
Monitor Evaluator
options and judges accurately inspire others and can be overly critical
Single-minded, self-starting and
Can only contribute on a narrow front
Specialist dedicated. They provide specialist
and tends to dwell on the technicalities
knowledge and skills
Challenging, dynamic, thrives on
Can be prone to provocation, and may
Shaper pressure. Has the drive and courage to
sometimes offend people's feelings
overcome obstacles
Practical, reliable, efficient. Turns ideas
Can be a bit inflexible and slow to
Implementer into actions and organises work that
respond to new possibilities
needs to be done
Painstaking, conscientious, anxious.
Can be inclined to worry unduly, and
Completer Finisher Searches out errors. Polishes and
reluctant to delegate
perfects
Table 1.7 Be/bin's team roles (Source: www.belbin.com)
To work out what type of person you are and what role you would play in a
team, Belbin devised a questionnaire. Upon answering various questions, you
obtain a score and can see which role fits you best. Organisations often use
17
CHAPTER 1 Types of organisations and how they operate---- -- - -- -- -- -- -- -- - - ----'
this method when creating teams to make sure the right mix of people and
ski lls are used.
Apply
Consider what type of characteristics you have and what role
you would play in a team.
Once a team is created it does not function immediately. It takes time for the
people to get to know each other and to bond. Tuckman (in 1965) identified four
stages within team development. These are shown in figure 1.6.
(ERFORMING)
r STORM ING ,
,. r
NORMING
F '
Figure 1. 6 Tuckman's four stages of team development
Forming: This is the first stage of the team when people first meet each other.
Storming: This is when members get to know each other and begin to share ideas
and goals. Views are shared in a stronger way, and arguments may occur while
people work out where they fit in the team.
Norming: This is when things have calmed down and people understan d their
roles. Everyone accepts each other's behaviour.
Performing: This is when the team is working well together and is getting the
results they set out to achieve.
Remember
Tuckman's four stages of team development:
• Forming • Norming
• Storming • Performing
Stakeholders
The people within an organisation are not just the people who physically go into
the workplace every day or those who are on the payroll.
Many people outside the organisation are also key to the success or failure of
the business.
Stakeholders are any individuals or groups of individuals that have an interest in
the organisation.
Stakeholders can be referred to as internal or external. Internal sta keholders are
people or groups of people who are involved directly with the business. Examples
of internal stakeholders within a production organisation are as follows.
18
• Directors
• Employees
Investors
External stakeholders are people or groups of people who have an interest in the
organisation and could be affected by it, but are not directly linked to it. Examples
of external stakeholders within a production organisation are as follows.
• Customers
• Bank providing credit to the organisation
• Suppliers
1?.ernernber
Internal stakeholders are within the organisation
External stakeholders are outside the organisation
Figure 1.7 shows the variety of stakeholders an organisation may have.
External stakeholders
Suppliers
Society
Figure 1.7 Stakeholders (Source: adapted from www.image.slidesharecdn.com)

Since stakeholders can influence organisations, they need to be managed very
carefully. An unhappy stakeholder could cause problems for the organisation. For
example, if an external stakeholder, such as a member of the local community,
found out that an organisation was dumping its waste in the town, they would
naturally be angry. This stakeholder may go to the media, and a news story could
be published that shows the organisation in a negative way.
If an internal stakeholder, such as an investor, found out that the organisation
was not buying their products competitively and they could be better sourced
elsewhere, the investor could remove their money.
Not all stakeholders have the same interest and power, so it is important to
understand which stakeholders need managing closely.
19
CHAPTER 1 Types of organisations and how they operate-- -- -- - -- -- - - -- - - - - - - -- .
The stakeholder matrix in figure 1.8 shows the different types of stakeho lders and
how they need to be managed.
Manage closely
High Keep satisfied
(Key player}
,_
QJ
s:0
Q.
Low Minimum effort Keep informed
Low High
Interest
Figure 1.8 Stakeholder matrix based on Mendelow's theory
Keep satisfied: These stakeholders have a high level of power but are not overly
interested in the running of the business. They are likely to be investors or
shareholders who are mainly interested in a good return on their investment. It is
important to keep these stakeholders satisfied.
Manage closely: These stakeholders have a high level of interest in the business and
high power. Therefore, it is important to make sure they have all the information they
need, are involved in decision making and play a role within the organisation. These
stakeholders are likely to be senior managers or people external to the organisation
who have a lot of control, for example, the government.
Minimum effort: These stakeholders are the least important ones, but they are
sti ll key t o the organisation. Without them the business may not fun ction or be
successful. These are small customers or small suppliers. They require little effort
from the organisation but may like to see a representative from the business once
a year for an update and to feel valued. This will keep them engaged.
Keep informed: These stakeholders do not have much power within t he
organisation but are very interested. These could be people who are very
interested in the environment and watch organisations close ly to make sure they
are not causing harm. These stakeholders are likely to lobby or protest if things
are not as they should be so it is important to keep them informed.
Apply
Who are the stakeholders in your organisation? Are they
internal or external?
Objectives in organisations
An objective is what a busi ness wants to achieve and where it wants to go in the
future. Objectives are the aims of an organisation.
It is important to set objectives so the employees know where the business is
going. This can help to motivate th em.
Objectives can be very simple such as the following.
• Surviva l • Growth • Increased profit
20
' - - - - - - - - - - - - - - - - - - - - - - - - C H A P T E R 1 Types of organisations and how they operate
Organisations all have clear objectives, but they are not the same for every
organisation. Different organisations have different needs and goals, which results
in a variety of objectives being set.
As we have already learned, organisations can be public sector, private sector or
third sector. Each of these types of organisations has different objectives.
Public sector organisations exist to provide a service to the general public and are
ruled by the government. Their objectives may be driven by satisfying government
standards and regulations.
Return on
Private sector organisations exist to make a profit and deliver a good return on investrnent
investment for the people who have put money into the business. Their aims A measure of
profitability that
may be driven by financial success.
indicates whether a
Third sector organisations exist to deliver a social purpose - for example, raising gain or loss has been
generated compared
money to help a community project or look after the welfare of animals. They have
with the initial cost
no desire to make a profit and their objectives may be driven by the desire to see
positive social change. Mission
statement
Because these businesses all have different reasons for existing, their objectives Short statement
will all differ. setting out an
organisation's
purpose
Mission statements and vision statements Vision stat~~rnent
A statement
Organisations will often publish their objectives so the public or their stakeholders describing the future
can see what they are setting out to achieve. Organisations create mission desired state of the
statements or vision statements to explain their objectives in a clear way. organisation
An example of a mission statement ~·~·ir

Global leader Apple's mission statement is "Apple llfli).,
designs Macs, the best personal computers in the world, •-· ~ . ··~--~···~···-·
along with OS X, ilife, iWork and professional software.
Apple leads the digital music revolution with its iPods
and iTunes online store."
In order for Apple to constantly meet its mission
statement it has to ensure it remains a market leader.
The fact that their mission contains such a strong
statement pushes the organisation to develop new
technology, promote innovation and remain a huge
global success.
These objectives are set to help motivate the staff to
maintain the mission statement. They are empowered
by the mission statement and encouraged to voice new
ideas and concepts to help maintain Apple's status.
Many organisations follow Apple's lead but so far no other
company has beaten Apple to market with a new concept
in the area of digital computers or music software.
It is widely believed that the powerful mission statement
contributes towards Apple's continued success by
driving its employees to strive for new developments
and keep one step ahead.
A mission statement explains the organisation's business, the reason it exists and
its goals. It defines the aims and the way it intends to reach the objectives.
21
CHAPTER 1 Types of organisations and how they operate----- -- -- - -- -- - - - -- - - -- -
Well-known coffee chain Starbucks' mission statement is "Our mission: to inspire

and nurture the human spirit - one person, one cup and one neigh borhood at
a time."
A mission statement does not have to be about the products or services the
organisation makes or supplies. It can be a much wider perspective on what the
organisation wants to do.
A vision statement is an aspirational (desired) statement of where the organisation
would like to get to in the future. It is a long-term view and helps the business to
decide how it will develop.
Vision statements can be short or long. This depends on t he company and how
they wish to portray themselves.
Caterpillar's vision statement is very short: "Be the global leader in customer value."
On the other hand, Heinz's statement is very long: "Our VISION, quite simply, is to
be 'THE WORLD'S PREMIER FOOD COMPANY, OFFERING NUTRITIOUS, SUPERIOR
TASTING FOODS TO PEOPLE EVERYWHERE.' Being the premier food company does
not mean being the biggest but it does mean being the best in terms of consumer
value, customer service, employee talent, and consistent and predictable growth.
We are well on our way to realizing this Vision but there is more we must do to fully
achieve it."
Apply
Which style of mission or vision statement do you think would
work best for your organisation and why?
Tools for setting objectives

When setting objectives, organisations need to be sure t hat t hey are SMART.
The SMART criteria guide you when setting objectives. SMART objectives are clear,
and it will be simple to assess whether they have been met. Figure 1.9 explains the
SMART criteria in more detail.
Make the objective specific.

s Specific Explain exactly what you want to
achieve and how it will be done.
Make the objective measureable.

M Measureable Ensure there is a way to check you
have done what you set out to do.
Make the objective achievable.

A Achievable Objectives can be challenging but
make sure the outcomes happen.
Make the objective relevant.

R Relevant The objective has to t ie in wit h the
goals of the organisation.
Make the objective time bound.

T Time bound Set deadlines to work t o in order
to complete the objective as planned.
Figure 1.9 SMART criteria
If a privat e sector organisation's overall objective is to increase profit, the SMART

criteria may read as fo llows.
22
Specific: Increase profit by 10% by increasing sales of chocolate bars

Measureable: Review sales figures each month to check progress
Achievable: With the team motivated and focused, this is achievable
Relevant: The business wants to gain new customers so this objective fits
Time bound: The 10% profit increase is to be realised within one year
When setting SMART objectives, it is also important to consider factors outside the
organisation to decide if they are actually achievable.
Rem.ember
An organisation's objectives should be SMART.
• Specific • Achievable • Time bound
• Measureable • Relevant
The STEEPLE framework is another tool that can help organisations to consider
these outside factors and whether they will affect goals and setting of objectives.
See figure 1.10 for examples.
SOCIAL TECHNOLOGICAL ECONOMIC
• oemographics • Emerging technology • Local economy

• Trends • Internet • Exchange rates
• Customer buying patterns • Information and .- Inflation
communication
ENVIRONMENTAL POLITICAL LEGAL

• Green p_olicies • Government policy • current legislation
• Sustainability • International relatfonships • Health and safety
• Carbon footprint • Funding • Employment law
ETHICAL
• Intellectual property
• Reputation
• _confidentiality
Figure 1. 10 STEEPLE framework
Rernen-iber
The STEEPLE framework helps to identify outside factors that
will affect an organisation.
• Technological • Political
• Economic • Legal
• Environmental • Ethical
It is important to consider all the STEEPLE factors when setting organisational

objectives to make sure they are SMART.
Objectives for individuals

Objectives can be written for the employees as well as the organisation as a
whole. When employees have objectives to work towards, it helps to increase their
motivation - as per Herzberg and Maslow's theories mentioned earlier in the chapter.
23
CHAPTER 1 Types of organisations and how they operate - - - -- - - -- -- -- - -- - - - - - - -'
As with organ isational objectives, objectives set for people need to be SMART.
People need to buy into the objectives that have been set. It is important for the
workers to be involved w hen the objectives are set to ensure they understand
w hat is required and that they commit to working towards them.
Buy in
When people believe Objectives for people within the workplace can be both hard skill and soft
and support an idea
skill related.
Hard skills are skills that are specific and can be taught. Examples of hard skills are
as follows.
• Learning to use a new computer system
• Gaining a professional qualification
Soft skills are harder to teach and often develop w ith time and practice. Examples
of soft skills are as follows.
• Team working
• Good comm unication
Apply
Do you know w hich hard and soft skills you have?
Personal and o rganisational objectives need reviewing regularly to make sure that
they are being met and are fair and reasonable.
Organisationa l objectives are likely to be discussed during board meetings when

the directors are all together. Stakeho lder m eetings w ill also invo lve discussions
about the objectives and how t hings are going. If the objectives that have been set
are SMART, it is easier for the directors and managers to review them and assess
progress. This is because t hey are measurable so they can set criteria to review
them against.
Board meeting
Regularly held The same appl ies to persona l objectives. These should be reviewed between the
meetings between worker and their manager at regu lar intervals throughout the year. The worker
all the directors of an
can then get feedback from their manager as to how they are doing and ask for
organisation
help if they need it.
It is important that the personal objectives challenge the worker so t hat they
can learn new things and progress in the business. If a worker does well and
meets their objectives it is not unreasonab le to t hin k that they wou ld like a pay
rise, promotion or more responsibility. This is part of their develo pment within a
business and keeps them motivated to want to do more.
Culture
When setting objectives, the culture of the organisation is also something t hat needs
to be looked at. The objectives have to fit with the culture the organisation has.
The culture of an organisation includes many thi ngs such as the atmosphere when
you walk in, how people are dressed, how people ta lk to each other or how much
things cost.
Some quotes shown below explain how culture can be seen.
' Culture is how things are done around here. It is what is typical
of the organisation, the habits, the prevailing attitudes, the grown-up
pattern of accepted and expected behaviour.,
(Dr ennan, 1992)
24
(Hofstede, 2002)
(Brown, 1995)
Although these quotes are from different people at different times, they all define
culture as something that is shared and created from various factors or habits.
The culture of an organisation is not formed overnight. It is something that evolves
or develops over time. Lots of different things affect the culture of an organisation.
Some of these are shown in table 1.8.
Stories
• Stories told internally or externally about people or the business, that show
what is important.
Power
• Who is in charge? What are they like? How much power do they have?
Routines
• Regular meetings. Team lunch on Fridays.
Structure
• Who reports to whom?
Table 1.8 What forms culture?
Cultures can be described as strong or weak within organisations. Strong cultures

can be found when a business shares its objectives, mission statements and what
is important to it with all its staff. This is where everyone understands what is
required and is keen to make things happen for the good of the business.
Weak cultures are not aligned and the workers aren't trying to achieve the same
thing. There may be less communication from the management to the workers.
Some may not even know what they are supposed to be achieving or what the
objectives are.
Check
List five things that influence culture in an organisation.
Apply
Which culture does your organisation have? What sort of
organisational culture do you think would get the best out of
its workers and why?
25
CHAPTER 1 Types of organisations and how they operate - - -- - - - -- - - - -- - - - -- -- -- -
Organisational structure
It is important to understand that an organisation's structure can play a key part in
the type of culture that is created.
There are four types of organisational culture that are lin ked to the structure of
a business. Charles Handy defined these four types of culture in 1985. You will
revisit these later in the chapter after learning about structure in more detail.
Within an orga nisation, it is important that there is a structure. Like a building,
without a solid structure, an organisation will fall down or fail.
An organisational structure will show the different roles w ithin the business. It also
shows clearly who reports to whom and how the roles relate to each other.
Figure 1.11 is very a basic structure that shows how the people within an
organisation work together.
l ! i i
Human
Marketing Finance Operations
resources
Team
i i
Team
i
Tea m
i
Team
leaders leaders leaders leaders
Team
i i
Team
i
Team
i
Team
members members members members
Figure 1.11 Basic organisational structure
There are two main types of organisational structure. Organ isations can use a
mixture of both as they expand, but for the purpose of this chapter we will st udy
the following.
• Flat structure
• Tall structure
Flat structure
Manager Manager
Staff Staff Staff Staff Staff Staff Sta ff Staff
Figure 1.12 Flat structure (Source: adapted from www.bhs-business.com)
26
As shown in figure 1.12, a flat structure is a structure where there are few or no
levels of management. This type of structure means that the workers are more
able to make decisions and be involved in the running of the business. There are
fewer levels of management to go through if they want a decision to be made.
Workers in this structure have more responsibility. Businesses that use this type of
structure have fewer salaries to pay as there are no middle managers.
The disadvantages of this type of structure are that workers often don't have
a direct manager to help them if they have a problem. This structure often has
a lot of workers who know a little bit about everything but not a lot about one
thing. Therefore, specialist knowledge is lacking and often has to be sourced from
outside the organisation.
Tall or hierarchical structure
Director of Director of Director of Director of Director of

finance HR sales operations purchasing
Accounts HR Sales Marketing IT Quality Purchasing

manager manager manager manager manager manager manager
Figure 1.13 Tall structure (Source: adapted from www.bhs-business.com)
As shown in figure 1.13, a tall or hierarchical structure is based on a pyramid.

Everyone in the organisation has somebody to report to except the person at
the very top. The advantages of this structure are that everyone knows who their
manager or supervisor is, there are clear levels of jobs within the business and
there are more opportunities for promotion as there are more jobs available than
in a flat structure.
The disadvantages are that there is more competition in this structure and, as there
are more people, more departments and more jobs. Sometimes workers think that
other departments are getting a better deal than they are which can cause internal
arguments. Also, within a tall structure, communication can be less effective than in
a flat structure. The messages have to flow up or down the pyramid. This can take
time, and messages can get changed along the way. In a flat structure the salary
budget is low whereas in a tall structure there is a very high salary budget as there
--- ply -·-· - - .

are many more people involved in running the business.
hich structure do you think would be best for an organisatio.n

u are familiar with and why?
·=~ --"
.6'11----------~----
~
--~·· ~- - "--·-·------ " ·-·--
27
CHAPTER 1 Types of organisations and how they o p e r a t e - - - - - - - - - - - - - - - - - - - - - - -
As mentioned earlier in this section, culture can be based on organisational

structure. Here are the four types of organisational culture as defined by
Charles Handy.
• In a task culture specialised teams are formed to achieve targets and solve
problems within the organisation.
• In a power culture power is given to a few key people at the top of the
organisation. Control is not shared but decision making can be very fast.
• In a role culture people have specific responsibilities that have been given to
them by senior people in the organisation based on their interests, special skills
and education. This can encourage ownership of the work.
• In a person culture the employees believe they are more important than
the organisation as a whole. This can make it difficult for the organisation
to function.
Remember
There are four types of organisational culture that can be based
on organisational structure.
• Task culture
• Power culture
• Role culture
• Person culture
Apply
Which types of organisational cultures do you think fit with tall
structures and which with flat structures?
The formal and informal organisation

Most people think of organisations as being a formal arrangement and in business
this is usually the case. However, some organisations are informal.
Formal organisations
Formal organisations are stru ctured, planned and well-organised operations.
They are usually formed for a specific purpose and are a legal entity. Examples of
formal organisations include the following.
• Farms
• Schools
• Training centres
• Doctors' surgeries
Formal organisations can be public sector, private sector or third sector.
In a formal organisation everyone has a clear role and knows what that role
is. Everyone knows who they report to, the responsibi lity they have and their
level of authority. A formal organisation usually has clear objectives to help it to
progress and make a profit, or generate money for a cau se if the organisation is
third sector.
Formal organisations are usually set up for the long term.
28
---------------------~CHAPTER 1 Types of organisations and how they operate
Informal organisations
Informal organisations also exist and there are probably more than you would
imagine. Informal organisations are less structured, are not legal entities and
are often formed by like-minded people coming together with a shared goal.
Informal organisations are often created without prior planning or investment.
The following are examples of informal organisations.
• Online forum
• Sports club which runs after school
• Running club
• A group of like-minded people who enjoy socialising together and
meet regularly
Informal organisations are created to fulfil a social need and have fewer rules
and regulations than a formal organisation. They are likely to be smaller in
number than formal organisations and are not set up to last for a long time or
make a profit.
An example of an informal organisation

Grace decided to set up an informal organisation with
several like-minded friends of hers to try to stop a local
•-··
®
~ ------·-~--__..... ---~--~
~
builder erecting a housing estate on an area of parkland.
During a gathering at a local cafe, Grace mentioned how

she felt about the development. She was concerned
because many local children play on the parkland. If the
parkland was turned into a housing estate the children
would not have anywhere to go. From her experience as
a police officer, she knew that bored children could get
into mischief.
Several of Grace's friends shared her views and

concerns, and so the organisation was formed. They
named it 'Ban the Build'.
The friends met once a week and discussed ideas

about how they could stop the houses being built.
Grace decided to write to the local newspaper with the
organisation's concerns. To her amazement, the story
was published. The story featured a link to an on line
petition that people who were against the housing
estate being built could sign.
Grace couldn't believe it when she logged on the

following week. The petition that she had hoped would
get 100 signatures had over 5000.
The local authority were presented with the petition

and, due to the strong views of the local community,
the planning was rejected and the housing estate was
not built.
29
CHAPTER 1 Types of organisations and how they operate----- - - -- -- -- -- -- - - - - - -
Table 1.9 outlines the main difference between formal and informal organisations.
Aspect Formal Informal

Definition Organisations that is formed and Organisation that is formed by like-minded
becomes a legal entity with a view to people who share a common interest
meeting set objectives
Members Workers who know their roles, Friends, and people who share the same
responsibilities, level of authority and hobbies, who want to be social and
objectives interact
Set up By the owner an d investor with a clear Often set up as an impro mptu idea w ith
structure and forward planning lack of planning, little structure and no
objectives
Aim To make a profit or raise money To meet a social need
Time Aims to last for a long time Lasts as long as it lasts
Communication Official and legal Word of mouth and informal
communication methods such as e-mail
Regulated Rules, policies, processes Nothing official. Guided by beliefs and
shared ideas
Management Official structure No structure
Size Often large Usually small
Table 1.9 Comparison of formal and informal organisations
Apply
What are the different formal and informal organisations that
you belong to?
Identify the key operating

functions within organisations
An organi sation has many functions within it. Each function co ntributes t oward s
th e efficiency of the business. Functions of an organisation are also referred to
as departments. Each department usually comprises manager(s) and people who
work under their instruction. Some departments have lots of individuals and
some few. Regardless of its size, each department has an importa nt role to play to
ensure an organisation succeeds.
Differentiation and integration in

organisations
Differentiation and integration are two contrasting ways in which an organisation
can function. These two ways of fun ction ing often present themselves at different
points as an organisation develops.
Orga nisations, regardless of whether they are private sector, public sector or third
sector, whether they are limited businesses, sole traders or partnerships, all develop
at different rates. Think of organisations like people. Everyone develops at their own
30
'-----------------------~CHAPTER 1 Types of organisations and how they operate
speed, reaches maturity at a different time and has different needs.

The speed of an organisation's development is based on different factors,
including the following.
• Managers and leaders
Economy
• Industry sector
• Culture
• Structure
Managers and leaders who are extremely driven or have the investment they need
to develop their organisation may act quicker than managers and leaders who are
more cautious and who need to find funds.
The economy could hold back the development of an organisation if the
exchange rate is not going in favour of the country in question or if the current
business climate is not thriving. On the other hand, if the opposite applies, and
the exchange rate is favourable and the market is thriving, the economy could
help an organisation to develop.
The industry sector plays a part in organisational development. If a particular
sector, such as high street retail, is doing well, this could help a retail business
to thrive. For example, if shops in a certain high street do well, customers will
be encouraged to buy goods in other shops in the same street enabling a new
business to develop more quickly.
Culture, as you have learned earlier in this chapter, is very important. The various
styles and types of culture can lead an organisation to develop quickly and
successfully or be held back.
Flat structured organisations will develop at a different rate to tall structured
organisations. More people will be involved in an organisation's development if it
has a flat structure, which may increase the speed of progress.
Apply
Which structure do you think would see an organisation
develop quickly?
As an organisation develops, it can follow differentiation or integration as a style to

organise its methods and plans.
Differentiation
When large companies develop or expand, differentiation can occur. Sometimes
this is the chosen strategy or plan, and sometimes it happens due to lack of
control from management.
Differentiation is when some departments within the organisation break away
and form their own set of rules, ways of working and, over time, a different culture
from the main business.
For example, in a service organisation the finance department could break away
from the sales department and create a different style of working. This could be
something as simple as starting work at a different time to the sales team.
Differentiation in a production or manufacturing organisation could be where
two areas of the business are making similar things but in a very different way.
Consider a bakery. The team in charge of making loaves of bread may operate in
31
CHAPTER 1 Types of organisations and how they operate---- - - -- - -- - - - - -- -- -- - ---'
a very different way to those making doughnuts. The different departments could
have different ways of ordering their raw materials or different shift patterns.
Integration
Unlike differentiation, integration is where an organisation wo rks with all the
departments to ensure they are aligned. A well-integrated organisation has the
same rules, policies and strategy running throughout the business. This sort of
organisation is led by the m anaging director or CEO who ensures the chosen
style of working is delivered from the top down in the same way. Everyone in a
particular office who works the same number of hours per week will start and
finish work at the sa me time, and will share the same values and culture.
The team dynamics within differentiation and integration are very different.
Within a business that organises itself using differentiation there is not likely to
be much interaction between departments, idea sharing and team working. On
the other hand, with integration as a method, the t eam members from different
departments are likely to work closely together for the benefit of the organisation.
Using a differentiation and an integration strategy

Sanjay runs Say it with Flowers, a flower shop in a
small town. Recently, Sanjay received an inheritance
from a relative overseas and decides to invest it in his
business . He buys another shop in a neighbouring town
and employs a manager to run it. Sanjay has proven
systems in place to buy the fl owers, ribbons and other
items he needs to sell his flowers. He shares these
with the new manager who states that they want to
do things differently as they t hink they can m ake more
money. Sanjay agrees to this, understanding it as a
differentiation approach.
After three months, Sanjay calls a meeting as profits
are low. Having looked at the books, it is clear that the
differentiation approach is not working as the second
shop's costs are higher. Sanjay decides to change
his strategy to an integration approach where he is
responsible for all ordering and delivery to the two sites.
A team that involves members from different areas of the business is known as
cross-functional. All members of a cross-functional team are looking to reach the
sa me end result or goa l for the benefit of the entire organisation.
Cross-functional teams can be made up of people from finance, marketing,
procurement, sales or production. We will lea rn more about the different
function s in an organisation further on in this section.
Figure 1. 14 Cross-functional jigsaw

(Source: adapted from www.keystoneinnovationchallenge.com)
32
- - - - - - - - - - - - - - - - - - - - - - - C H A P T E R 1 Types of organisations and how they operate
Figure 1.14 shows how different people from different departments can all fit
together in a cross-functional way.
Thinking back to earlier in the section, it is clear that cross-functional teams are
more likely to produce a high-performing team as they have access to all skillsets
within the organisation. As we learned from Belbin's research earlier in the
chapter, with the chance to gather together and include people from all functions
of the business, it will be easier to fill each team role with the person who is best
suited. Table 1.10 gives an example of how this could be done.
Resource Investigator Sales department
Teamworker Human resources department
Co-ordinator Senior management
Plant Marketing department
Monitor Evaluator Finance department
Specialist Research and development department
Shaper Customer services department
Implementer Design department
Completer Finisher IT department
Table 1.10 Cross-functional teams using Be/bin's theory
Check
Describe the advantages and disadvantages of differentiation
and integration.
I si
Every organisation, no matter how small, has a lot of different functions. Sole
traders often do all roles as they do not have any staff. Therefore, they have
to be skilled in several different areas. Larger organisations are usually made
up of many departments. Each department is responsible for a function of the
organisation. As we covered earlier in this section, sometimes the functions all
work together in alignment - this is an integrated style; and sometimes they work
independently of each other - this is a differentiation style.
Functions in an organisation are varied and include, but are not limited to, the below.
• Finance
• Administration
• Customer service
• Human resources
• Information technology
33
CHAPTER 1 Types of organisations and how they o p e r a t e - - - - - - - - -- - -- -- - -- - - -- -
• Marketing
• Operations or production
• Procurement
• Research and development
• Sales
The finance department is also known as the accounts department. This area of
an organisation is responsible for managing the finances of the busi ness. Within
the fin ance function there are several sections, as shown in table 1.11.
Overall responsibility for the business budgets and

Finance director or FD
expenditure.
Responsible for processi ng and paying suppliers'
Accounts payable
invoices.
Responsible for invoicing customers and ensuring
Accounts receivable
invoices are paid.
Working closely with HR, payroll is responsible for
Payroll
processing salaries.
Table 1. 11 Finance team roles
The administration department ensures that all filing, paperwork and electronic
records are up to date and in order. Some examples of administrative roles are
shown in table 1.12.
Works directly for a senior person in the business,

PA (personal assistant) managing their diary, writing letters and taking minutes
in meetings.
Administrative Supports various functions within an organisation to
assistant ensure smooth running of departments.
Welcomes visitors to the organisation. Answers all
incoming calls and forwards to the correct department
Receptionist
or takes messages. Often deals with post and helps
with various administrative tasks.
Table 1. 12 Administrative team roles
People working in the customer service department are often the voice of the
organisation. Customers calling a business will first speak to the receptionist, and
then if they have a query or a complaint, they will speak to customer services. They
are responsible for trying to answer all questions and resolve queries in a timely and
professional manner. Customer service teams are often quite large. Think about
when you ring an energy provider to query your electricity or gas bill. These people
are customer service workers. Within this function there is always a team leader or
supervisor. If the call taker cannot answer a query, or if the customer becomes irate,
the supervisor takes over the call. The supervisors have more authority than the
Recruitment customer service team members and can often calm customers by offering refunds.
The act of finding a
Human resources, more commonly known as HR, but also sometimes referred
person or persons to
do a role within an to as personnel, is the department that is responsible for the management
organisation of people within the organisation. HR are in charge of recruitment, training
34
needs, development of staff, staff disputes and payroll. As mentioned above,

the finance department works with HR on payroll. HR's responsibility is to
ensure that staff get fair salaries, pay rises are processed and letters are written
to confirm changes, whereas the finance department physically processes the
payment to make sure the salaries go into the workers' bank accounts.
The information technology (IT) department works with all people in an
organisation. Almost all businesses have computers and telephone systems,
and it is the IT department's responsibility to ensure these machines keep
working and remain safe and secure. IT department jobs include setting up
new employees on the organisation's system, managing back-up systems to
avoid losing the organisation's work and making sure anti-virus and malware
software is up to date to protect the organisation from being hacked. In a
world reliant on technology, it is very important that IT systems are always
working well to make sure the day-to-day activities of a business can happen.
IT is involved in almost every aspect of a business. Some examples are shown
in table 1.13.
Communication
• E-mails, letter writing, apps on smartphones
Order processing
• Inputting orders on to a system that is linked to the production department
Manufacturing
• Computer-run machines that produce the goods to sell
Paying invoices
• Bankers Automated Clearing Service (BACS) transfers of money from one
business to another
Marketing
• Websites, e-shots, direct mailing
Designing
• CAD (Computer Aided Design) systems
Table 1.13 IT involvement
The marketing function within an organisation is responsible for the

organisation's brand identity. Promoting the business, its products or services, Brand
and making people aware of what it does is critical to its success. Marketing staff The image of an
design and maintain websites, and create marketing literature such as catalogues, organisation. The
name, logo, slogan,
flyers and merchandise. Marketing staff also arrange events to promote the colours, etc., that
business' brand. In the last few years marketing has changed a lot and much differentiate it from
of the advertising and raising of awareness is now done through social media. the competition
Marketing staff spend a lot of time on websites like Face book, Twitter, lnstagram
and Linked In. It is important that marketing staff keep the organisation's profiles
up to date on social media as a lot of business is now done this way. Finally,
marketing teams conduct research on their customers' views of their products or
services. This feedback is given back to the organisation to help them plan their
objectives for the future.
35
CHAPTER 1 Types of organisations and how they operate-- - - - -- -- - -- -- - - -- - - - - -
The operations or production department is responsible for making sure the

production organisation makes the goods it needs to fulfil its orders. Roles within
the operations or production department are varied. Some examples are shown in
table 1.14.
Shop-floor Make the goods the organisation sells; these workers can be
operatives hands-on or can operate machines that do the manual work
Responsible for managing the operatives and making sure
Team leaders
production deadlines are met
Responsible for interpreting the sales orders. They schedule
Production
and arrange the production on the shop floor to produce the
planning
goods and fulfil the sales orders
Responsible for arranging the transport that delivers the
products to the customer. This role may involve looking after
Logistics a fleet of lorries and drivers, if the organisation has its own
vehicles, or managing external transport, such as couriers or
contracted hauliers
Responsible for making sure the products made meet the
Quality control
required standards and are fit for purpose
Table 1. 14 Operations team roles

The procurement function is key to an organisation and is often overlooked.
If you look at organisational structures, this area is frequently missed off.
However, with the help of CIPS, procurement is rapidly developing into a better
understood function within business. A well-run procurement department can
save an organisation a lot of money on overheads and the raw materials needed.
Procurement departments are respon sible for the following.
• Sourcing and ordering goods and services
• Managing suppliers
• Managing contracts
• Managing stock levels
• Writing tenders
There are a number of roles within a large procurement function. Some of these
are shown in table 1.15. In a small organisation is it likely that one skilled person
will do all the roles.
Head of
Responsible for everything to do with procurement and the team
procurement
Responsible for sourcing goods and services and managing
Senior buyer
suppliers. Often a product specialist
Reports to the senior buyer and is responsible for buying
Buyer certain products or services (often a buyer can be a specialist
in one area, e.g., packaging buyer)
Reports to buyer and is responsible for checking order
Exp editor acknowledgements and ensuring deliveries arrive on time
and in full
Table 1.15 Procurement team roles

The research and development (R&D) function is responsible for designing and
bringing new products to the organisation or improving current products to keep up
with market trends. This department may have workers who are engineers, chefs or
36
: - - - - - - - - - - - - - - - - - - - - - - - - C H A P T E R 1 Types of organisations and how they operate
scientists. Their role is to develop ideas and concepts from a rough sketch on a piece
of paper into an actual product, which is fit for purpose and attractive to the end user. z
The sales function is responsible for visiting customers and getting orders.
Sales teams can be based in the organisation, contacting clients by telephone
or other means, or on the road, visiting clients face-to-face. Sales teams are !ikHls
Skills used when
often given targets to meet which link to the budget the financial director has
communicating and
prepared. People who work in sales must be excellent communicators and have dealing with people
good skills. There are many roles linked to the sales function.
Table 1.16 shows some examples.
Sales director Responsible for all the sales within the organisation and the team
Internal sales Work inside the organisation trying to win orders
External sales Work away from the organisation (on the road) to win orders
Business development
Visit potential customers and try to develop a relationship
manager (BDM)
Lead generators People who find clients that the BDM then visits
Table 1.16 Sales team roles
As you have learned, an organisation has many functions, each function being
critical to the success of the business. All functions need to work together to
achieve the objectives that have been set.
In table 1.17 you will see how all functions need to work together to help achieve
the set objectives. Ultimately all organisations want to survive, whether they are
profit making, service providing or doing good for the community.
Contribute towards ensuring all workers are paid and procurement's suppliers
Finance
are paid.
Input orders for sales, write letters for HR, answer the telephones for all
Administration
departments.
Deal with complaints to keep customers happy so they place more orders with
Customer service
sales.
Ensure contracts are in place, staff are trained and safe at work. Approve payroll
Human resources
for finance to process.
Keep computer systems running and virus-free so marketing can send e-mails
IT
and production machines can make the orders to meet sales' orders.
Raise brand awareness to ensure sales get orders so production has goods to
Marketing
make and procurement has materials to buy.
Operations/
Makes the orders sales have won. Needs raw materials that procurement source.
Production
Acquires the goods and services for the business to complete the orders that
Procurement
sales have won and production will make.
Research and Develops new products for sales to sell, procurement to buy and marketing to
development promote.
Wins orders for the goods R&D have designed, for which procurement then have to
Sales
source the raw materials. In time finance have to send invoices to the customers.
Table 1. 17 Functions working together
It is now clear to see how a cross-functional team can benefit a business as

all departments help each other. An integrated organisation would embrace
all functions and work together on an objective, whereas a differentiated
37
CHAPTER 1 Types of organisations and how they o p e r a t e - - - - - - - - - - - - - - - - -- - - -- -
organisation would be less aware of how the other functions worked and how
they could help them.
Apply
How do departments in your organ isatio n interact with
each other?
Differentiating procurement and supply

Procurement and supply are often believed to be the same thing. This is not the
case, although the two roles do work closely together and both come under the
same department within an organisation.
Without procurement, there would be no supply, and without supply, procurement
could not fulfil its objectives.
The goal of procurement and supply together is to meet the Five Rights of
Procurement/Purchasing. This is to buy products or services to the following criteria.
• The right quantity • From the right place
• The right quality • At the right price
• At the right time
There are other factors to consider too, such as the 'right place'. It is important for
procurement to consider the geographical location of both the supplier and the
end user when making decisions on buying products or services.
Remember
The Five Rights of Procurement/Purchasing
• The right quantity • From the right place
• The right quality • At the right price
• At the right time
Procurement
Procurement is the act of obtaining something, be it tangible or intangible, for
instance a product or a service. Procurement is the entire process from identifying
Strategic the need to when the goods or services are delivered. Procurement is a strategic
High-level planning, function of a business and involves a high level of skill. Procurement involves
usually related to many elements including supply.
long-term goals
Figure 1.15 shows how the procurement function flows. We will go through each of
these stages in more detail below.
Identify the need
/
Supply happens
here
- Manage the
contract & review
""Develop the
specification & set
terms
Evaluate responses Research & evaluate

and award contract suppliers
Send out
RFQ or tender
/
document (ITT)
Figure 1. 15 Procurement process flow

38
Identify the need

The procurement function reacts to a need that is generated from the end user
or customer. If, for example, a car manufacturer needs more steering wheels to
fulfil its order book, it would have a need. The car manufacturer would tell the
supplier that they have a need. A would be raised, either in paper
form or electronically, and given to the procurement team. The need is now clearly Paper or electronic
identified and passed to procurement to action. document stating
a need for
procurement to
Develop the specification and set terms supply a product or
service
Although a need has been identified, it does not mean that the procurement
function is aware of the specification of what is needed. Several things need to
be looked at before an enquiry can be sent out. The specification should contain
information on the various elements shown in table 1.18.
What the product is called and its unique part code.

Description For example, the steering wheel may be described as 'plastic,
black, round steering wheel - ABC1 '.
The drawing will show the exact size, dimensions, material and
Drawing
weight of the steering wheel.
If there is a special colour to match the brand this will be detailed
Colour
and may also feature on the drawing.
Quantity How many are required in total?
How do the steering wheels need to be packaged?
Wrapped individually?
Packaging • Loose in a box?
How many in a box?
• Returnable packaging?
Also known as lead time.
When are the steering wheels needed? The lapse of time
Delivery between placing an
How many boxes at a time?
order with a supplier
Is the supplier to quote for transport or provide a collected price? and receipt of the
What quality specifications do the steering wheels have to meet? goods
BSI standard?
Quality
International standards?
A certain specification provided by the end user?
Table 1.18 What goes in a speofication?
If the specification does not contain all the information needed, it is acceptable to
ask for this missing information. If a buyer within the procurement function has
a good knowledge about the product and the manufacturing process, it is fine
for them to challenge the specification. They may believe something is wrong or
think there is a better way of doing things. For example, ifthe buyer knows that
the price drops if more than 100 items are ordered and the specification on the
requisition states 95, it would be good practice to suggest increasing the amount
to save money.
Once the specification is set, the procurement function can set the terms for the
order; for example, how many steering wheels will be ordered at a time.
39
CHAPTER 1 Types of organisations and how they operate-- - -- - -- - - -- - -- - - - - - - --
Research and evaluate the suppliers

Once a procurement function knows what it needs to buy to fulfil the needs of the
customer, it can start to research suppliers that ca n make or supply the goods. It
is worth noting here that the need does not have to be tangible, so procurement
teams could be searching for suppliers to meet a service specification.
Service specifications are harder to define as they are open to interpretation . If a
specification for a grass cutting service stated the grass had to be cut short each
w eek, how short would that be? People have different views and hence service
specifications can be hard to manage.
Using the steering wheel exa mple, the procurement fun ction would need to
research suppliers that can make such items. Resea rch can be done in the
following ways.
• On the Internet
o Google can be very useful to find out information on su ppliers
• Through existing relationships
o A supplier already on the database may be able to make the steering wheels
• At trade shows
o Meeting potential suppliers at shows and asking about their business
Evaluating suppliers before sending out the enquiry includes a large range of things.
Table 1.19 shows the types of t hings a procurement function needs to evaluate.
Could the supplier cope with the order?

Capacity
Do they have the machinery, staff and skills to do it?
Environmental Does the supplier cause lots of pollution?

policies Do they dispose of their waste correctly?
Does the company look to be performing well?
Financial
Do they have any bad debts?
stability
What is their credit rating?
Is the supplier based in the same country?
Location
Can the supplier manage the logistics of deliveri ng the goods?
Does the supplier have a good reputation?
Reputation Are there any rumours about the supplier that need
investigating?
Table 1.19 Supplier evaluation
A simple scoring process can help to work out which suppliers are most suitable to
work with. Figure 1.16 is an exa mple of a supplier eva luation chart.
Score out of 1O
Supplier Capac ity Environment Financial Location Reputation Total
Supplier 1 4 8 7 6 7 32
Suppli er 2 8 8 8 9 9 42
Supplier 3 7 3 5 8 6 29
Figure 1. 16 Supplier evaluation chart
40
- - - - - - - - - - - - - - - - - - - - - - C H A P T E R 1 Types of organisations and how they operate
It can be seen from figure 1.16 that Supplier 2 would be the most suited based on
the criteria outlined above.
z
Send out an RFQ or invitation to tender (ITT)
Once the suppliers have been researched and evaluated an for
ot<Jti<m) or ITT to documents can be prepared and sent
invitation to
out. These documents must contain all the information from the specification.
suppliers to bid on
This means that the possible suppliers have all the details they need to be able to specific products or
send a quote back. It is acceptable to send drawings out with the documents or services
if the specification is lacking detail.
The RFQ or tender must have a deadline on it stating the date by which suppliers tender
Document inviting
have to return their quotes to the procurement function. potential suppliers to
quote for business
Evaluate responses and award contract
Examples of the
Once all the RFQ or tender responses have been received by procurement, they product that is
need to be evaluated. Ray Carter devised criteria for supplier evaluation in 1995. required
His criteria can be used when researching suppliers at the early stages or when
evaluating the responses to make sure everything has been checked before any
contracts are put in place. Table 1.20 shows Carter's 10 Cs.
Ray Carter's 10 Cs
Competency
Is the supplier competent? Can they supply the goods/services required?
Capacity
Does the supplier have the machinery, time and resources to supply the goods/
services?
Commitment
Does the supplier have a commitment to supplying quality products that meet
the specification?
Control
Is the supplier in control of their suppliers? Can the procurement function be
sure that supply will be continuous?
Cash
Is the supplier in a good financial position? Could they survive if the economy
was not strong?
Cost
Is the supplier offering a fair cost? Consider the cost for everything, not just the
product, i.e. transport and packaging.
Consistency
Is the supplier able to deliver the same product time after time? Can quality
always be met? Can goods always be delivered on time?
Culture
Does the supplier's culture fit with the customer's culture? Culture was discussed
earlier in the section. It is important both organisations share beliefs, values and
strategies.
41
CHAPTER 1 Types of organisations and how they operate-- -- -- -- - -- - - - - - - - - - - - -
Clean
Is the supplier 'green' and do they do their best to be environmentally friendly?
Communications
Is the supplier able to communicate with the buying organisation as needed?
Consider whether computer systems are able to work together. Are the working
hours the same?
Table 1.20 Carter's 10 Cs (Source: Ray Carter, www.raycarter.co.uk)
Remember
Carter's 10 Cs
• Competency • Cost
• Capacity • Consistency
• Commitment • Culture
• Control • Clean
• Cash • Communications
Once the evaluation process has been completed, a decision can be made as to
which supplier would be best suited to the contract.
Price is a key area to consider but, as we have learned above, many other things
need thinking about before a decision is made.
When the decision is made, the procurement f unction can award the supplier with
the contract. The terms within the contract will be negotiated. This will be covered
in chapter 2.
Once the contract is signed and starts, it is important that the procurement
function manages the contract. Suppliers need to be spoken to, feedback given
and any issues that may arise need dealing with quickly.
Procurement functions often have quarterly business reviews (QBRs) with their
suppliers to review the contracts. Things that may be reviewed include quality and
whether deliveries are on time.
It is fair to say that not every requisition demands evaluation as detailed above. If
the requisition is for a repeat purchase, for example, and the relationship with the
current supplier is good, the order would naturally go to them.
Supply
Procurement is a strategic area of business. Supply, although also strategic to an
organisation, is more transactional.
Supply is a very important area within procurement as it is the act of physically
getting something from the supplier to the customer. Supply is a key part of
procurement. Supply often involves many organisations. Consider buying the
steering wheel we discussed earlier in this chapter. The organisation that supplies
the steering wheel to the customer is their supplier. However, the steering wheel
organisation will have suppliers too. These suppliers need to perform well if the
steering wheel organisation is to meet the needs of their customer. All aspects of
supplying a product or service are collectively known as the supply chain.
According to Handfield and Nichols (2002), the supply chain 'encompasses all
those organisations and activities associated with the flow and transformation
of goods from the raw materi als stage, through to the end user, as well as the
associated information flow'.
42
- - - - - - - - - - - - - - - - - - - - - - - C H A P T E R 1 Types of organisations and how they operate
The supply chain involves a network of individuals, organisations, technology,

activities and resources to make sure goods or services flow through the chain.
Figure 1.17 shows a basic supply chain. Here it can be clearly seen how many
organisations are involved and how they have to work together to achieve results.
If one part of the chain fails, every organisation further up the chain also fails.
Steering
Raw wheel
Our Car
material
Figure 1.17 Basic supply chain
The supply chain could fail for a variety of reasons, which is why it is key to
monitor and manage the chain constantly.
Possible issues within a supply chain could be as follows.
• One supplier goes into Uquidation
A form of insolvency
o If one part of the chain suffers financial problems, then supply stops.
when an organisation
Everyone in the chain relies on the organisation before them carrying out is brought to an end
their role.
• The end customer goes into liquidation
0 If the end customer goes into liquidation, the identified need is no longer
there so there is no purpose to the supply chain.
• Computer system failure
o Technology failure could cause production to stop in one part of the chain,
which would have a knock-on effect further down the chain. For example,
computer systems could get hacked and orders changed.
• Key resource failure
o A key team member could leave or become ill. Without a back-up plan for
their role, production could stop.
• Raw material shortage
o If a raw material became short in supply and the supplier could not get
enough, everyone else in the chain would suffer.
• Force majeure
o An act of god, i.e. earthquake or flood. If this happens and destroys a
supplier's factory, everyone else in the chain is affected.
Part of the role of supply chain workers is to expedite the orders. This means
that certain people within the department are responsible for checking orders
that have been received by the supplier, checking an order acknowledgement
has been received, progressing the order to make sure everything will be on time
and monitoring possible problems. If an expeditor discovers something that may
hold up an order, they can inform others who can try to prevent problems further
down the chain.
As you have learned, procurement is a strategic function, which involves lots of
planning, research, negotiating and important decision making. Supply is about
the delivery of orders, as agreed in the contract created by procurement. Supply
professionals make sure the orders get delivered as needed, that the production
lines keep going and manufacturing organisations and services are being provided
where they should be. Procurement and supply must work together to be an
effective function.
43
CHAPTER 1 Types of organisations and how they operate--- - - -- - -- - - -- - -- - -- - -
Apply
Within a supply chain, describe how one element could fail and
explain the effect this would have across the supply chain.
Chapter Summary
Now you are aware of the types of sectors an organisation can be in and
you can explain the differences between them. Production and service
organisations have many differences as well as some similarities. You now
can identify each organisation and describe what traits they have.
You can describe how organisations operate including how objectives,
structure, people and culture interact. There are many different functions
within an organisation. You can now identify each department, what role they
carry out, and how they interact with other departments.

0 The National Health Service in the UK is an example of an organisation
from which sector?
a. Public c. Third
b. Private d. Primary
e 'Surviva l', 'growth' and 'make a profit' are examples of what?

a. KPls c. Service level agreements
b. Objectives d. Mission statements
e HR, customer services and procurement are typical examples of what in

an organisation?
a. Employees c. Functions
b. Shareholders d. Partnerships
44
CHAPTER2
,,..-·-~~-.,"
Learn:ving
outcome
\. -·~® By the end of this chapter, you will know the
components of contractual agreements.
'"-~,,-
Chapter overview
Identify types of contracts
• Spot purchases
• Term contracts
• Framework arrangements/blanket orders/panel contracts and call offs
Identify the kind of pricing arrangements applied in commercial
contracts
• Fixed pricing, lump-sum pricing and schedule of rates
• Cost-reimbursable or cost-plus arrangements
• Variable-pricing arrangements
• Target-pricing arrangements
• Risk-and-reward-pricing arrangements
Define the different documents that compose a contract for the
purchase or supply of goods or services
• Defining contracts and agreements
• The use of tendering and quotations
• The documents that comprise a contract - the specification, key
performance indicators (KP ls), contract terms, pricing and use of other
schedules
• Contracts for the supply of goods or services
Introduction
In this chapter you will look at contracts; their importance, the different types
and when each type is best used. Contracts can be for spot purchases, for a long
or short term or for an agreement to have goods or services supplied at certain
times, in certain quantities.
45
CHAPTER 2 The components of contractual agreements-- - - -- - - - -- -- -- -- - - - -- -
Pricing arrangements can vary depending on the need and the organisation.
Prices can be fixed, variable, linked to a target or be linked to a reward-of-risk
arrangement. This chapter will explore all pricing options through examples.
Contracts can be complicated and are made up of a variety of processes and
documents. Contracts can be for goods or services and therefore can be quite
different from one another. You will learn about what forms a contract, what a
tender is and how it fits within procurement. The final part of this chapter will
examine w hich documents are included within a contract, why they are important
and how they are created.
Identify types of contracts

Contracts form a very important part of procurement, and it is essential that
people working in this function understand them.
Enforceable A contract is an agreement, enforceable by law, between two or more people,
bylaw to do or abstain from doing some act or acts.
A court can compel
those involved in A contract is legally binding and exists in every commercial transaction.
the contract to fulfil
their contractual Without a contract, how wou ld the procurement team and the supplier know the
obligations following?
• What should happen?
• When things shou ld happen?
• Where delivery should be?
• When payment is required?
For a simple contract to exist and be va lid, the following shou ld be in place.
• Intention: All parties must have the intention that their agreement can be
enforced by civil law, i.e. if something goes wrong, one party can take legal
action against the other. If either side is not wi ll ing to be exposed to this, a
contract cannot be made.
• Consideration: This is the bargain or exchange aspect of the contract. It is a
promise on one part for an act on another, for example, consideration for the
sale of a car would be the amount offered.
• Agreement: Both sides have discussed what will be in the contract and what
they have agreed to do. If this has not occurred a contract cannot be made.
Agreement has two components.
• Offer: Offer to sell something at, for example, $100
• Acceptance: Somebody takes up the offer
Contracts will be covered in more detail in section 2.3.
Spot purchases
Contracts can take many forms. The first type you are going to look at is spot
purchases.
People spot buy a lot in their daily lives. Shopping for groceries, a new outfit or a
new television are all examples of spot buying. These purchases wi ll not go into
stock, be repeated regularly or be secured for future needs.
46
- - - - - - - - - - - - - - - - - - - - - - - - C H A P T E R 2 The components of contractual agreements
purchasing or spot buying is used to buy one-off or

immE~di;3te requirements.
Spot purchases still involve a contract, but a consumer may not even realise that
they have entered into a contract.
An example of o spot purchase

A consumer goes into a shop, sees the television that
they want and its specification and price. This price is an
'invitation to treat'. The consumer makes an offer to the
shop whereby they say either that they will buy it for the
price advertised or suggest a different price. The offer
is then accepted, perhaps signified by the shaking of a
hand, and the consumer pays for the television. This is
an example of a spot purchase.
Spot purchases often involve a standard contract, one that may never be seen,
between the retailer and the buyer. These standard contracts are the same for
everything sold by a retailer to their customers. This is true in a supermarket when
a customer buys their weekly shopping. The supermarket does not provide a
contract for every customer; a standard contract exists and somewhere within the
supermarket it will state that 'standard terms apply'.
Within a business organisation, spot purchases can be for items that are rarely
bought and are high value, or for things that are needed at the last minute where
supply is more important than price.
Organisations sometimes spot buy products that change price regularly so
they can shop around and try to get the best deal. Goods or services that are
spot bought are usually paid for at the point of purchase rather than on a
credit account. Figure 2.1 shows examples of items that an organisation could
spot buy.
Business cards for

Fuel New machinery
a new employee
• Ever-moving • Likely to be a •Could be a

prices one-off buy last-minute buy
• Shopping around ·A spot buy would whena new person
for a spot buy ensure best price is recruited and
could save money is achieved needs business
cards quickly
Figure 2.1 Items an organisation can spot buy
Spot buys still require a specification (see chapter 1), but the supplier relationship
is likely to be transactional rather than strategic because there may never be any
more orders placed with them.
When ordering for a spot purchase, an organisation usually refers to its standard
terms. This means that when a purchase order is placed with the supplier, the terms
the order is placed against have not been negotiated beforehand, but are written
on the reverse of the purchase order. As the transaction is unlikely to be repeated,
there is no point in writing specific terms and negotiating with the supplier.
47
CHAPTER 2 The components of contractual agreements--- - -- -- - - - - - - - - - - - - - - -
Remember
Spot purchases use standard terms as the supplier relationship
is likely to be transactional.
Term contracts
Unlike a spot purchase, which you have learned uses standard terms, term
contracts exist for a set amount of time (a 'term') and include specially written
terms (contractual obligations). Term contracts are used frequently in business
organisations where they are more cost effective than spot buying.
Term contracts can be for goods (tangible) or services (intangible).
Term contracts could be used for the following.
• Supplying parts to a manufacturi ng/production organisation
• Supplying electricity to an office
• Supplying cleaning staff to an organisation
Table 2.1 outlines what is included in a basic term contract. The Five Rights Theory
can be seen here, as described in chapter 1. The contract must include details on
the Quality, Quantity, Product, Place and Price as the basis of the agreement.
Full description/specification of goods/services

Description/specification
Drawings
Quantity How many items are required in total?
Quality What quality specifications have to be met?
Where and when are deliveries to be made?
Delivery requirements Do the deliveries have to be on a certain type of
vehicle?
Price What is the price agreed per item?
When will the invoices be paid?
Payment terms
How will the invoices be paid?
How will the goods be packaged/how many per box?
Packaging
Returnable/recyclable packaging?
Term How long is the contract for?
Who owns the tools for making any products, or
Ownership of tooling
goods needed to provide the service?
Currency What currency will be used for the invoices?
Law Which country's law will be referred to?
How much notice does either party have to give if
Notice
they wish to terminate?
Dispute resolution Should a problem occur, how will this be resolved?
An individual with
capacity
A person who is Table 2.1 What does a basic term contract contain?
legally able to enter
into a contract The contract must include the names and addresses of the two parties entering
because of their
appropriate age and into the agreement, along with a date and signatures by individuals with
state of mind capacity.
48
Term contracts all contain similar aspects, which are discussed and negotiated
between the supplier and the buyer.
Term contracts take time to create and include all aspects in the procurement
flow diagram from chapter 1. It is very important to make sure every part of the
contract is correct as, once the contract starts, it could cost a lot of money to
end it early or to make changes. Consider if a procurement professional signed
a contract that had the wrong specification of goods or services required. The
knock-on effect on the organisation could be huge. If steering wheels came into
a car-manufacturing organisation and were not the right size to fit the vehicles,
production could stop. Thinking about the supply chain covered in chapter 1, the
potential effects of this could cause many organisational issues.
It is perfectly acceptable for a procurement professional to engage with team
members and think about cross-functional teams from chapter 1 to be sure the
contract is correct before it is signed. They may use the expertise and knowledge
of the research and development department, the operations department and the
finance department to make sure that the contract suits the organisation. If the
organisation has a structure that is integrated rather than differentiated, it will be
much easier to work with colleagues, as discussed in chapter 1.
Spot purchases and term contracts both have their place in procurement.
Their key features are compared in table 2.2.
Time Quick to action Long process
Resource Fewer people involved More people involved
Duration One off Long term
Products/services One-off purchases Items continually required
Planning Short term Long term
Price Can change regularly and dips Negotiation ensures fair

can be taken advantage of pricing
Relationship Transactional Strategic
Table 2.2 Key features of spot and term contracts
Apply
Think of some of the items that you use regularly. Are these
bought using a spot purchase or term contract?
Alternatives to spot purchases and term contracts are framework arrangements,

blanket orders, panel contracts and call offs.
49
CHAPTER 2 The components of contractual agreements-- - -- - -- -- -- - - - - --------
As these alternatives show, arrangements other than a contract can be present in

a relationship between a buyer and a supplie r.
Framework arrangements
A framework arrangement is an 'umbrella' arrangement between two or more
organisations that have established that they want to work together as suppliers
and buyers, but have not yet finalised the terms of the agreement. A framework
is not a contract but explains the terms that will govern the contract when it is
formed. A framework does not usually last longer than four years.
Remember
A framework arrangement is usually formed when a buyer
knows they have a need but do not know the exact timescales
and delivery quantities for that need.
Often, products or services purchased through a framework
arrangement are low value and high volume.
Framework agreements are used ever more frequently within procurement and
are seen as a smarter way to place orders. Frameworks mean that individual
terms do not have to be set up and agreed for every order placed. Different
products or services can be supplied under the same framework agreement.
Framework terms include the followi ng.

• Pricing
• Quality
• Quantity
Pricing model or structure

One of the main areas included in a framework arrangement is the pricing model
or structure. This does not mean that final prices are agreed, but the formula for
calculating prices is set.
For example, if a framework agreement was for oil, the pricing structure could be
as follows.
Base price Base price + 15% = buying price

The initial price of
something without This 15% will cover the supplier's overheads, such as staff, utilities and transport,
the added costs and make them a profit to keep their business sustainable.
such as handling,
t ransport and profit The price the buyer pays can therefore increase or decrease depending on the
current market price of the raw material.
Quality and quantity

Quality of the goods or services can also be defined in the framework agreement
so each order (or call off) will meet this specification.
A guide on required quantity is another feature in the framework. This gives the
supplier the chance to manufacture, or prepare to manufacture, and hold what
wi ll be needed.
A framework is not a contract; it is a freestanding document. When the buyer ca lls

off an order, if no supporting contract is in place, the supplier does not have to
50
supply the goods or service. If the supplier accepts the call-off order, a contract is
I
formed and they have to supply. This process is shown in figure 2.2. . 2.1
Figure 2.2 Framework flow
Blanket orders
A blanket order is an order that is placed with the supplier that allows the buyer to
call off quantities, as they need them, over an agreed time period.
A blanket order requires an accurate forecast of what is needed from other
members of the organisation, if it is to be successful.
Working across departments ta estimate a blanket order

Consider a production organisation that makes car
engines. Within the car engine is a part that is on a
blanket order. For the blanket order to be effective the
quantities that are needed to meet production have to
be accurate. In this situation, the procurement team
would get a requisition from the operations team,
and this requisition would be based on information
provided by the sales team. The sales team information
would be linked to orders they have secured and to
future forecasted sales. This is the level of collaboration
required across the organisation in order to put together
an accurate call-off quantity.
A blanket order follows the same procurement process as outlined in chapter 1.

Figure 2.3 shows the procurement team's responsibilities for a blanket order.
l?eniernber
Identify the need
Obtain the speciOcation and

set terms
Research and evaluate
--i-·--
the suppliers
J
Send out RFQ or ITT
I
t
Evaluate responses and I
award contract ___J
t
Manage the contract
Figure 2.3 Procurement team responsibilities for a blanket order
51
CHAPTER 2 The components of contractual a g r e e m e n t s - - - - - - - - - - - - - - - - - - - - - - - -
A blanket order has a set price for the goods or services for the duration of
the order.
The buyer provides the supplier with a call-off schedule for the order to give them
an idea of when goods or services will be needed. Some suppliers insist call offs
are taken exactly as per the blanket order, whereas some are more flexible. Some
suppliers charge an add itional cost if the goods or services are not taken as per
the schedule.
There are advantages to a blanket order for both the buyer and the supplier.
The buyer knows they have their needs met for a certa in period and know the
price is set. Finan cial departments are satisfied because the stock-holding levels
within the business are lower. The stores department only has to stock what is
needed for the short term.
The supplier is happy as they have guaranteed business coming their way for a set
amount of time and can forecast their work accurately.
The downside to a blanket order for a buyer is that if their received forecast is not
accurate, they could face financial penalties from the supplier if all stock is not
called off. If they have to accept the products from the supplier they could end up
with a stores department full of things they have no need for.
From a supplier's view, the disadvantage is that they could be holding stock
for longer than they would ideally need if the buyer delays in calling off their
requirements.
Panel contracts
Panel contracts are used when it is not possible to simply use one supplier to
satisfy the need. Panel contracts are frequently used in the public sector.
Panel contracts involve several suppliers in the same category that can all supply
the same product or service. The suppliers all work to the same terms. Consider
a category such as consultancy. There would be many suppliers on the panel
contract as each consultant could offer different skil ls and bring something
different to the organisation. Satisfying the exact need would depend on which
supplier was used.
Panel contracts are commonly used for goods or services that are bought
frequently. Specifications remain the same and therefore there is less work involved
from procurement as the panel is already evaluated and researched. If a new
product was required, the specification could simply be added to the contract of
already-vetted suppliers.
Panel contracts can help to ensure the need is always met as there are several
suppliers to choose from. They can also aid competition and drive prices down as
ultimately all suppliers on the panel are competing for business.
The disadvantage of a panel contract is that a new entrant to the market could be
considerably more su itable to supply the goods or services. They could have invested
in better equipment, have superior resources or be a lot more cost-effective.
However, if this supplier is not on the panel contract, they cannot supply the buying
organisation.
52
- - - - - - - - - - - - - - - - - - - - - - - C H A P T E R 2 The components of contractual agreements
Call offs
A call off is the physical act of ordering your goods or services to be delivered.
Within a framework agreement, when an order is called off and the supplier from
the framework arrangement accepts the order, a call-off contract is formed. The
supplier has to fulfil your call off as per the framework arrangement, making sure
they keep to the agreed criteria as follows.
• Pricing
Quality
• Quantity
As mentioned in the sub section on framework agreements, a call off does not
have to be accepted by the supplier. A contract is only made when acceptance
from the supplier is received. Once the order has been accepted, the terms of the
framework arrangement cannot alter.
To summarise, frameworks, blanket orders and panel contracts all have a place
within procurement. When thinking about which style or agreement to use,
consider the following.
• Value of product or service
• Quantity needed
• Frequency of need
• Specification - will it change?
• Are a lot of suppliers of the product/service required?
two components make up an agreement?
Apply
Consider a company looking to set up an agreement to
procure a low-value, high-volume component of their best-
selling piece of equipment. The design will not change for
three years. It is critical production does not stop. Which form
of agreement would you use?
----
Identify the kind of pricing

arrangements applied in
commercial contracts
As we have learned, there are many types of contracts and agreements that
can be used in procurement. There are also a range of pricing agreements and
structures that can be included in these documents.
Pricing structures consist of fixed pricing, lump-sum prices, and schedules
of rates.
53
CHAPTER 2 The components of contractual agreements-- -- -- -- - - - -- -- - -- -- - - -
As with most decisions within business, there are lots of things to take into
consideration before a procurement professional can decide which style of pricing
arrangement would be best for their organisation.
A procurement professional must consider the following.
• Type of work the contract is being priced for
• The relationship of the buyer and supplier
• How much involvement is required by each party
• How much risk is the buyer prepared to take
• The financial state of the buyer's organisation
Table 2.3 explores the above considerations in more detail.
Type of work
• Is the type of work product-based (tangible) or service-based (intangible)?
• Is the work a one-off purchase or ongoing?
• What is the value of the contract?
• How critical is it to the organisation?
Relationship
• What is the style of relationship with the supplier?
• Is the relationship open and honest (collaborative) or closed and lacking trust
(distributive)?
• Is the relationship going to be a long-term one or simply last for the duration
of this contract?
Involvement
• How much involvement does the buyer want in the project?
• Will the buyer be monitoring prices throughout?
• Will the buyer be demanding cost breakdowns of every aspect of the
contract?
Risk
• How much risk is the buyer prepared to take?
• Is the pricing strategy offered free from risk?
• Is the supplier prepared to take any risks?
Financial position
• What is the financial position of the buyer?
• Can the buyer afford to gamble with pricing or would they prefer up-front
costs?
• Can the buyer pay in accordance with the suggested strategy?
• If the strategy chosen involves risk, can the buyer afford to pay more?
• If the strategy chosen involves risk, can the supplier afford to earn less?
Table 2.3 Considerations for pricing
54
As you can see above, there are a lot of things to take into account as a
procurement professional before making the final decision on a pricing strategy.
The strategy that works best for everyone, the ideal outcome, is called 'win-win'.
Figure 2.4 shows the possible outcomes of any situation between two people or
organisations in business.
Supplier Win-!ose Win-win
Supplier Lose-lose Lose-win
Buyer Buyer
Figure 2.4 Win-win matrix (Source: adapted from the Kilmann Conflict Mode Toof)
The four squares each show a different outcome that can result from a negotiation
or decision that an organisation makes.
In the context of pricing, the two parties are the buyer and the supplier.
• Win-lose is where the buyer wins and the supplier loses.
• Win-win is where both the buyer and the supplier win.
• Lose-lose is where both the buyer and the supplier lose.
• Lose-win is where the buyer loses and the supplier wins.
If you consider the win-win matrix as part of the pricing strategy decision, the
ideal outcome would be that both parties involved are happy with the pricing
strategy chosen.
Now you will learn in more detail about the different types of pricing strategies
or models.
Fi
Fixed pricing is where the price the supplier quotes does not change. This quote
may be a response to the request for quotation or tender.
For example, if a procurement professional wanted to set up a blanket order for
the supply of their engine components over a six-month period, the supplier
would be expected to send back a fixed price. This price, once accepted by the
buyer, and once the order has been placed and accepted by the supplier, cannot
be changed without mutual agreement.
In a service contract, fixed pricing can also be used. With an intangible contract,
the fixed price could include, for example, the cleaning of the office once a week
55
CHAPTER 2 The components of contractual agreements-- -- -- - - -- - -- -- - - - -- - - - -
for a year for a fixed price per month. The office could vary in its degrees of
cleanliness, so some weeks there may be more work to do than others, but the
price would not change.
Within fixed pricing, the buyer knows exactly how much the products or services
are going to cost for a set amount of time, i.e. the duration of the contract.
Therefore, the financial director will be satisfied as they can budget accurately.
The supplier knows exactly how much money is coming in to their business, in
relation to this contract, w hich could give them some financial stability. However,
although the supplier knows what amount of money will be coming in, they
cannot guarantee what expenses will be going out, unless they also use
fixed-price contracts in their supply chai n.
Remember
Costs withi n business can vary. Some costs are fixed, which
make it easier to budget accurately, but often there are also
variable costs, which are more unpred ictable.
Table 2.4 shows some examples of fixed costs and variable costs within
organisations .
Fixed cost
A cost that remains
constant in the short Fixed costs Variable costs
term irrespective of
production volumes Sa laries of management personnel Raw materials
Variable cost
Insurance Haulage costs
Costs that change
with the output of the
Rent on a factory Salaries for workers paid by the hour
organisation
Table 2.4 Fixed and variable costs
Figu re 2.5 shows fixed and variable costs in a graph format.
Total costs
QJ
:::J
c Total
~ variable
,_
<I.I
costs
-0
c
l1l
V1
<J
V1
0
u 1---===---------£...- Total fixed
costs
Output
Figure 2.5 Fixed and variable costs as output increases

(Source: www.economicsonline.co.uk)
56
From the graph, you can see that as increases the fixed costs remain the
same. However, the variable costs would rise, and this in turn makes the total
costs of the organisation rise.
Fixed-cost contracts also offer the supplier security for the duration of the contract.
They are certain that the workers within the organisation, i.e. shop-floor operatives, The amount of
have enough work to do for the period of time outlined in the contract. goods or services
an organisation
From a procurement perspective, fixed-cost contracts do not involve too much is producing or
work once they are set up. The procurement professionals have to manage the supplying
contract and make sure that the goods are arriving as per the order, on time
and to the right specifications, but they do not have to negotiate a price each Paper or electronic
document stating
time some of the goods are required. This frees up time for the procurement
a need for
department to work on other procurement to
supply a product or
Generally the prices on a fixed-price contract are higher than when spot buying
service
as the supplier has to cover the possibility that the cost may rise. Although the
supplier has the guarantee of business coming in, they cannot supply the goods
or services at a price that will not make them profit.
The suppliers have to make an educated guess on what the market will do and
how that may affect their costs. Of course, this only relates to variable costs, as
you have learned already that fixed costs do not change.
The advantages and disadvantages will be covered in more detail in chapter 4.
Check
Which of these outgoings could change in price for a supplier
offering fixed pricing?
Electricity
• Salaried staff
• Shop-floor workers
Raw materials
• Factory rent
Lump-sum pricing is when the supplier and the buyer agree a final price for an
order at the beginning of a project.
Think about building a house. The supplier would tell the buyer that the cost to
build this house is $XOOO. Payment split into
instalments across
It is the responsibility of the supplier to correctly work out the costings for the project, the period of the
because once the lump-sum pricing is agreed, this is the price the buyer pays. contract
Payment for lump-sum pricing strategies can be as it is often the case that Cash flow
The amount of
this type of pricing method involves a lot of money. If, for example, the supplier
money moving in and
building the house did not get any payment until the house was built, they may out of a business in a
have cash flow problems. particular period
With lump-sum pricing, all parties know exactly what they are going to have to pay
or receive for the project. This means that suppliers know exactly what profit they Higher than
necessary
are going to make, and buyers know what expenses they will incur.
Adopting this strategy means that the price may often be inflated as the supplier
has to be sure that they will make a profit.
If the market prices rise and the supplier has not accounted for this, there is a
possibility that at the end of the project they may not break even.
57
CHAPTER 2 The components of contractual agreements~----------------------
Apply
What type of cost could affect the supplier after they have
agreed to a lump-sum pricing quotation?
Schedule of rates
A schedule of rates is a table of prices that clearly shows how much a supplier will
charge for goods and services.
Schedules of rates are used when lump-sum pricing is not appropriate. For
example, when the buyer does not know exactly how much of a product or service
they will need.
The rates are set and then, depending on how much time or resources are
needed, the amount owed can be calculated.
Table 2.5 shows an example of how much it would cost to have painting done
in a home. The supplier can provide a schedule of rates and then the buyer can
measure their room and work out how much the job would cost them before
they commit.
Area to be painted Price($)

1 m2 50
2m 2 90
3m 2 130
4m 2 170
Domestic
Private, not business
Table 2.5 Schedule of rates (1)
Commercial
To do with business,
Table 2.5 is likely to reflect a domestic agreement rather than a commercial one.
intended to make a
profit
Apply
What other domestic services could use a schedule of rates?
Within an organisation, a schedule of rates would be used on a larger scale. The

same theory applies as within the domestic sector.
In some situations it is simply not possible to know exactly what is needed until
several variables have been determined. The case study below demonstrates this
problem and how a schedule of rates offers flexibility.
Table 2.6 shows a basic example of a commercial schedule of rates for supplying
and installing fibre-broadband cabling, which can be linked to the case study below.
10m+ 20m+ 30m+ 40m+ SOm+ 60m+

Price per metre in $ 10 9 8 7 6 5
Table 2.6 Schedule of rates (2)
58
When to use a schedule of rates

A well-known local business person is having a new
office block built. It is on the outskirts of a town that is
currently undergoing regeneration. The electricity supply
is being upgraded. Fibre broadband is being installed
within six months. The size of the building is known and
the amount of offices within the block has been agreed
in principle but could change. It is unlikely that the
office block will have all its tenants in contract until the
building work is complete.
The business person knows that they will need to put

wiring into the building to provide electricity and also
that most, if not all, offices will require fibre broadband.
However, at this stage, because they are not aware of

who the tenants will be, how many offices each business
will want, and what the businesses will be doing, they
cannot confirm with the contractors the amount of cable
and associated work they will need.
The business person has considered many options for

pricing agreements with their contractors and decided
that a schedule of rates would be the best and most cost
effective option.
s
r
Cost-reimbursable arrangements are arrangements that are used for the provision
of a service. These are also known as cost-plus arrangements.
Cost-reimbursable arrangements are used in a variety of situations, usually

relating to something quite urgent, such as the following.
• Repairing a building that has been damaged.
• Making a site that has been damaged by fire safe.
• Alterations to a factory to meet new legislation.
Due to the nature of the contract or service that is to be provided, it is not

always possible to understand exactly what is needed until the job starts.
A cost-reimbursable arrangement means that the supplier will charge the buyer
for their costs, plus an agreed fee.
The fee can be a fixed fee that has been negotiated and agreed before the work
starts, which means the buyer is aware of exactly how much that part of the
contract will cost.
The fee could also be an agreed percentage on top of the cost of the supplier's costs.
59
CHAPTER 2 The components of contractual agreements - - -- - -- - - - -- - - - - - - - - -- - -
Figures 2.6 and 2.7 show the two versions of how cost-reimbursable arrangements
could be formed.
Direct costs
+ + $Fixed fee
I
Indirect costs
Figure 2.6 Reimbursable cost with fixed fee
Direct costs X%fee
+
Indirect costs
+ +
Y%fee
~·· ..
Figure 2. 7 Reimbursable cost with percentage fee
This type of arrangement carries a significant risk for the buyer as they cannot
know how much the supplier is going to charge.
When entering into this so rt of arrangement it would be advantageous to use
a supplier that the buyer has worked with before and with whom they have
developed a high level of trust.
It is very important to understand which costs are going to be included and to
define them clearly.
There are two different types of costs to consider when using this arrangement:
direct costs and indirect costs.
Direct costs are associated directly with the job or contract in question. Usi ng
repairs to a building as an example, direct costs could be as follows.
• Bricks
• Cement
• Labour
Indirect costs are equally important and cannot be avoided, but are not associated
directly with the job or contract in question. Using the same example above,
indirect costs would be as follows.
• Salaries of support staff
• Rent of the office
• Lease hire of the company vehicle
Remember
Direct costs are directly associated with the job in question.
Indirect costs are not directly associated with the job in question.
60
Check
Which of these costs are direct and which are indirect?
• Hourly rate of a builder
Salary of accountant
• Raw materials
• Electricity
• Insurance
• Office rent
Packaging
The advantages and disadvantages of cost-reimbursable arrangements will be

covered in more detail in chapter 4.
Unlike fixed pricing that you learned about at the beginning of this section,
variable-pricing arrangements enable the prices to change throughout the
duration of the agreement.
Consider a contract to supply and buy electricity. You could agree to pay a fixed
amount per kilowatt hour or pay an amount that moves in line with the market.
Paying an amount that moves in line with the market is a variable-pricing
arrangement.
The graph in figure 2.8 shows how the price of electricity can fluctuate over
time, and thus the likelihood of prices going up and down in a variable-pricing
arrangement.
55
53
51
43
1 year ahead price, £/MWh
Source: Spectron
41L---'~--'-~...L-~~~'---'-~--'-~-'-~'-----'~--'-_..
May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr-
14 14 14 14 14 14 14 14 15 15 15 15
Figure 2.8 Variable electricity pricing (Source: Marex Spectron)
This type of agreement is suited to a buyer who studies the market of the
product or service they are buying and understands the trends. A skilled buyer
61
CHAPTER 2 The components of contractual agreements---- - - -- - - - -- - - - - - -- - --
could save a business a lot of money using a variable deal as long as their
judgement was correct. Thi s is, of course, a big risk and n ot all organisations are
willing to accept this.
Apply
Describe a situation where you may decide a va riable
arrangement is the best option.
The advantages and disadvantages of variable-pricing arrangements will be

covered in more detail in chapter 4.
Target-pricing arrangements
Collaborative This type of pricing arrangement is a collaborative approach between a supplier
Working together fo r and a buyer.
mutual benefit
This type of arrangement is where a target price is set and agreed between the
two parties, the buyer and the supplier, and the aim is to supply and buy the
goods and services for that agreement price or lower.
The target price set will be a lump-sum price, which you have learned about earlier
in this section.
Remember
A lump-sum price is where the supplier and the buyer agree a
final price for an order at the beginning of a project.
If the supplier achieves better than expected results, and supplies the goods or
services for less than the target price, it is not uncommon that they share the
profit with the buyer.
This type of arrangement works well in high-trust, long-term, strategic
relationships.
Target pricing
Another use of target-pricing agreeme nts is within the
agricultural sector. If a farmer has a price they have to
achieve for their grain in order to break even, then they
can work with the buyer to set a target price in order to
remain profitable.
This works within agriculture because grain is a

commodity that is traded, and hence the price moves up
and down very regularly. The prices of grain and other
commodities are tracked by traders who are skilled at
buying and selling at the optimum time to make the most
money for the seller, or get the lowest price for the buyer.
Consider the gra in example. The cost to produce the

grain is the amount the farmer will need to earn by
selling it to break even. Table 2.7 shows the costs that
have gone into producing one tonne of grain.
62
: / -
2.2;
Table 2.7 Grain production costs
You can see that the total amount to produce one tonne
of grain is $210.
The farmer will know from his budget how much money
he needs to earn to keep his farm profitable, and how
much he needs to invest in machinery, or to buy next
year's inputs.
Based on that information the farmer can decide the
minimum amount per tonne they need to sell the
grain for.
Once this has been decided that farmer can speak to a
trader and set up a target-price agreement. The trader is
then responsible for selling the grain at the correct time
to get the farmer the price they have specified.
The advantage of this type of agreement is that the farmer can almost guarantee
they will get the price they need to make a profit. The trader is unlikely to enter
into an agreement where they do not think the price needed is achievable.
The disadvantage of this type of agreement is that the market prices for grain
could rise unexpectedly after the trader has done the deal and obtained the
farmer's desired price. Had the farmer waited they could have received a better
price and made more profit.
Target-price agreements have a large amount of risk linked to them, so organisations

entering into them often have other contracts in place as well. For example, the
farmer may have sold half of the grain on a target-price agreement and half on a
fixed-price contract that was agreed earlier in the year when prices were high.
The advantages and disadvantages of target-pricing arrangements will be covered

in more detail in chapter 4.
s
As you learned at the beginning of this section, risk is a key area for buyers
and suppliers to consider when deciding which type of pricing is best suited to
the project.
Risk-and-reward pricing, as you would expect from the name, involves a degree
of risk.
A risk-and-reward-pricing arrangement is when the supplier takes a gamble. If the

supplier meets all the obligations of the contract, which will have been agreed with
the buyer, the supplier will get a reward. If, on the other hand, the supplier does
not meet the terms that have been agreed, they will be exposed to risk.
63
CHAPTER 2 The components of contractual agreements-- - -- - - - -- - -- - - - - - -- - - - -
When to use a risk-and-reward-pricing arrangement

Consider a contract for something intangible; for
example, a consultancy service. A consultant presents
a pitch to an organisation explaining that they can
work with them for six weeks and after that time
they will have shown them significant savings in their
supply chain.
Pitch
A business case The buyer is not confident in the pitch as they think
delivered to an their supply chain is working well, their supplier
organisation to try relationships are strong and they are getting good
to sell a product or
service
prices and service.
Th e supplier (the consultancy firm) is also confident
that they can achieve results, so in this situation a
risk-and-reward-pricing arrangement would be a
natural choice.
If the consultancy firm deliver savings they will be
rewarded with payment for t heir services. If they do not
deliver any savings, they will face ri sk, i.e. they will not
get paid.
These types of pricing strategies work best when the supplier has done a lot of
research into the buyer's business, and is fully aware of the facts and how they
can achieve resu lts. The client may be less aware of the positive outcomes and
therefore would be reluctant to agree to pay on a day rate or a set fee.
The client may also have limited funds. Their financial position may not be
strong so they may not be able to afford an up-front cost. With risk-and-reward
pricing they are protected by not having to pay for something that may not
benefit them.
Risk-and-reward-pricing agreements can also be used in situations involving
tangible outcomes. Consider a construction company building a new factory
for a global business. The business has a date when they want the factory to
Fully operational be fully operational .
Complete and
working to full The construction company is confident it can meet the deadline, but the owners of
capacity, i.e. a factory the organisation that have contracted that construction company are not. In order
would be built and to incentivise the construction company to meet t he deadline, a risk-and-reward-
producing goods pricing arrangement would be used.
This agreement would contain deadlines that had to be met in order for the
factory to be operational as required. If t he construction company meets these
deadlines, they get rewarded with a bonus amount of money.
It is in the construction company's best interest to meet these deadlines to
receive their bonus payments. It is likely that, without the bonus payments, the
construction company would not break even on the project. The advantages
and disadvantages of risk-and-reward pricing will be covered in more detail in
chapter 4.
To conclude, there are a range of pricing agreements which a procurement
professional has to identify and understand. Different projects, different
relationsh ips and different financial constraints all play a part in the decision as to
which strategy would work best.
64
Apply
Identify one situation within an organisation that would suit each
type of pricing strategy you have learned about in this chapter.
Define the different documents

that compose a contract for the
purchase or supply of goods or
services
i
Recap
As you learned in section 2.1, for a simple contract to exist and
be valid, the following must be in place.
• Intention: All parties must have the intention that their
agreement can be enforced by civil law, i.e. if something
goes wrong, one party can take legal action against the
other. If either side is not willing to be exposed to this a
contract cannot be made.
• Consideration: This is the bargain or exchange aspect

of the contract. It is a promise on one part for an act on
··~-Q·..#~.
/. V~,·~····-···· ··~·-···-·
another, e.g., consideration for the sale of a car would be
the amount offered.
• Agreement: Both sides have discussed what will be in the
contract and what they have agreed to do. If this has not
occurred, a contract cannot be made.
An agreement has two components.
• Offer: Offer to sell something at, for example, $100
• Acceptance: Somebody takes up the offer
agreement is based on an offer and an acceptance.
In this section of the book you will learn about contracts and agreements in
more detail.
Within law, the people involved in making the contract have to have capacity.
The law assumes that the parties entering into a contract have the capacity to
do so.
Capacity means that the person entering into the agreement is over the legally
accepted age of a particular country to do so. Minors, people under the legal
age, do not have capacity. People with mental disorders and persons in a state
of drunkenness or under the influence of drugs do not have capacity.
65
CHAPTER 2 The components of contractual agreements-- - - - - - -- - - -- - - - - -- - - - --
Intention is the first aspect of forming a contract. As you learned in section 2.1,
all parties entering into the contract must have intention. Without intention the
contract is not legal ly binding. If one party was t ricked into creating a contract,
there would be no intenti on on their part and therefore the contract could be
deemed void and wou ld not be val id in a court of law.
A legal example of intention

A legal case that outlines intention is that of Kleinwort
Benson Ltd v. Malaysia Mining Corporation Bhd (1989).
A Ma lays ian com pany ca lled MMC Metals Ltd was
quite new to bu siness. They needed a loan and
contacted KB Bank. As MMC was a new orga nisation,
the bank approached the holding company of MMC
to ask if they wo uld guarantee the loan. The holding
compa ny said it would not be a guarantor for the
loan, but did send t he bank a letter stating that they
made it their business to make su re their subsidiaries
can always pay their debts. The bank was satisfied
with this response and honoured the loan for MMC.
Unfortunately, MMC went into administration and
didn't pay t he loan. The bank tried to recove r the
money from the ho lding company and used the letter
as evid ence.
The court ruled agai nst t he bank as the letter had no legal
effect. The court ruled that as the holding company had
refused to be a guarantor they had no intention to be
lega lly bound.
Consid eration is the seco nd essential element in forming an agreement. If there is

no consideration, there cannot be a contract.
In law, consideration is something of va lue. Consideration is the price at which
one party promises to deliver someth ing to the other party.
Consideration is the price at which the product or service is offered. For example,
if a supplier wishes to sell 20 cakes at a price of $25, consideration is $25. The
supplier receives $25 in return for the promise that they w ill supply 20 cakes.
Contracts are based on promises.
Remember
Consideration is something of value. It is the price at which one
party promises to deliver something to the other party.
Consideration must be sufficient but does not have to be adequate. Thi s means
that consideration must have some value to both parties. However, the law does
not concern itself as to whether th is is adequate. For example, consider t he
situation whe re an agreement is made to sell a car. Initially the seller agrees t o
sell it for $1000, but they then realise they've made a mistake and that the car is
worth more than that. In this case, the law will not force the buyer to pay more.
Consideration has to be in t he present and cannot be in the past. Therefore,
consideration or promises made after an agreement has happened are not legally
enforceable. The case study below will help to explain this.
66
A legal example of consideration

A legal case that helps to explain consideration is
Roscorla v. Thomas (1842).
Roscorla and Thomas made a contract to buy a horse.
The sale took place and Thomas then promised Roscorla
that the horse was a good, safe horse. The horse turned
out to be unsafe and nasty. Roscorla was not happy, but,
as Thomas had made the promise after the sale, it was
deemed that consideration had taken place before the
contract was agreed.
Check
If Thomas had made the promise before the sale, would the
result have been the same?
As you have already learned, an agreement is based on an offer and an acceptance.

There is often confusion between an offer and simply receiving information.
A contract is only formed on acceptance of an offer, not from requested
information.
For example, an advert on the television is not an offer. This is simply supplying an
individual or an organisation with some information about a product or service.
This is known as an invitation to treat.
J-?.e1neniber
An invitation to treat is not an offer. It is simply information
about a product or service.
Catalogues or on line shops display their available range of products or services.

These are not offers, but invitations to treat.
The information supplied in an invitation to treat can change. A contract is not
formed until an offer is made against the invitation to treat.
Understanding an invitation to treat ·----~,.-~~,.. __ . __ . _ -~- _

Think about an advertisement in a magazine selling ~-·-· _ _ __ ____ __ __
a dress. There is a price shown in the advert. This too
is an invitation to treat. When the person responding
to the advert suggests a price, whether it is the
same price or a lower one, this is an offer. Now the
contract negotiation can start. If the seller of the
dress agrees to the offer, acceptance happens and is
communicated. At this point the contract is formed.
The seller of the dress has agreed to sell at the price
offered by the buyer.
67
CHAPTER 2 The components of contractual agreements - - - -- - - - -- - - - - - - -- - - - --
Legal examples of an invitation to treat

• Grainger and Son v. Gough (1896) - whereby a price list for wine was circulated. It
was ruled that the list was not an offer but an invitation to t reat.
• Partridge v. Crittenden (1968)- whereby there was an advert in a newspaper
for bramble finches, cocks and hens, 25 shillings each. This was ruled to be an
invitation to treat.
• Fisher v. Bell (1961) - whereby a shopkeeper displayed a knife in his shop
window. It was ruled that just because the knife was in the shop window it was
not an offer, but an invitation to treat. Therefore, the shopkeeper did not have
to sell the knife.
To form a contract, acceptance has to be clear and in agreement with the terms of
the offer given.
If the offer is accepted exactly as it is presented, this is known as unconditional
acceptance.
If the accepting party changes any aspect of the original offer, this is known as a
counter offer.
A pply
A printing company, Inky Printers, offers to sell 1000 black-and-
white business cards to a procurement manager who has just
been recruited to work for a paint manufacturer called Splash.
Splash pride them selves on their colourful, eye-catching logo.
The buyer from Splash accepts the offer from the printing
company and sends an e-mail stating they wa nt the business
cards to be in full colour.
Inky Printers need some new boxes to post out th eir
business card s in. Their packaging su pplier contacts them
and makes them an offer to supply 10,000 boxes delivered
on Friday for $2000.
Inky Printers are closed on Friday for training so they call their
supplier and ask if they could have delivery on Thursday instead.
Consider the above example: did any examples of
counter offers occur?
Communication of acceptance can happen in many forms. As you have seen in

the case study above, the companies communicated t heir feedback in different
ways. Both are equally acceptable. Methods of accepting an offer can include
the following.
• By t elephone
• E-mail
• Face-to-face in speech
• Shaking of hands
• Nodding of the head
• Raising a hand (in an auction)
• Letter
• Taking items to a check-out counter in a shop
In some situations, silence can occur after an offer has been made. Sil ence alo ne
ca nnot be deemed as acceptance.
68
A legal example oflww silence is not acceptance

The legal case Felthouse v. Bindley (1862) is a good
example of showing that the law does not accept
silence as acceptance.
Mr Felthouse wanted to buy a horse from his nephew.
Letters were exchanged regarding the sale of the horse.
Mr Felthouse sent a letter advising that, if he heard
nothing else back from his nephew, he would deem the
horse to be his at the price of £30.1 Ss.
The nephew did not reply.
In the meantime, Mr Bindley, an auctioneer on Mr
Felthouse's farm, accidentally sold the horse in question,
although Mr Felthouse had instructed him not to.
Mr Felthouse tried to sue Mr Bindley for selling 'his'
property.
The court ruled in favour of Mr Bindley, because there
was no evidence that an offer had been accepted, as the
nephew had not responded to Mr Felthouse's letter.
alone cannot be deemed as acceptance of a contract.
In relation to posting an acceptance, the law states that acceptance is deemed

to be complete as soon as the letter is posted. There is, of course, a possibility
that the letter will never arrive. However, legally, acceptance has happened. In
this situation an issue would arise between the seller and the buyer, as the seller
would not be aware that acceptance has happened.
~____ ___
~~!rch ~he lega:ase of.Adams:. Lindsel;
formation on postal acceptance.
,, ,,, -
(1818J~o~~urth~r t-(;;(.L.·-···-
-~··---··------·-"·---·~··---·
~
----·-
Offers can be terminated or come to a close in several ways. Once offers have
been terminated they cannot be reinstated. Table 2.8 shows the five main ways in
which offers can be terminated.
Acceptance When the person receiving the offer accepts it unconditionally.

Rejection When the person receiving the offer rejects it.
When the person making the offer changes their mind they can
revoke it. They may not want to enter a contract any longer, or
Revocation
realise the offer is incorrect. This is only possible until the offer
has been accepted. Offers cannot be revoked after acceptance.
When the person making the offer states that the offer is
Time only available for a specific amount of time, and that time has
passed, the offer is terminated.
When the person receiving the offer goes back to the person
Counter offer
making the offer with an amended offer.
Table 2. 8 Offer outcomes

69
CHAPTER 2 The components of contractual agreements - -- - - - -- - - - - -- - - - - - - - - -
Remember
There are five ways in w hich an offer can be te rm inated:
acceptance, rejection, revocation, time, counter offer.
The use of tendering and quotations

Rather than buying goods or services directly from a supplier, buyers can
specify their requirements an d then use a tendering process to invite suppl iers
to bid for the work. Tendering, or sending out a tender, and the use of
quotations are a key part of procurement. Both t enders and quotations have
a place within the profession, but each have the ir own m erits and situations in
which they are used best.
Tendering
A tender is a document that a procurement professional writes and sends out
to potent ial suppliers as an offer for them to supply goods or services to the
organisation.
Tendering is used in both the public and private sector. The main difference
between public and private sector tendering is that the private sector can choose
if they wish to use tendering to fulfil their need, whereas the public sector are
often dictated to by directives such as European Union legislation and have to
follow guidelines on certain contracts.
Apply
Research legislation relating to public sector tendering in a
country outside the European Union.
Tendering usually takes m ore time than simply obt aining quotations and hence is
more co mmonly used in the following situations.
• High-value contracts
• Long-term contracts
• Where t here are many available suppliers
There are two common types of tendering process: open tendering and restrictive
tendering.
Open tendering is where any supplier is able to submit a response to the tender
document. The document could be available on line, or could be requested from
a published advert. This form of tendering often gets lots of responses giving the
buyers many options to consider.
Restrictive tendering is w here supp liers who are pre-selected and evaluated as
having the ability to carry out the contract are invited to submit a response. These
companies may receive a letter or an e-ma il direct to them. This form of tendering
usually gets a lower number of responses t han open tendering.
Rem.ember
There are two common types of tendering process.
• Open tendering
• Restrictive tendering
70
The tender process involves four key stages illustrated in figure 2.9.
2.3
Figure 2.9 Tender process flow
Preparation is critical in the tender process. The documents to go into the

tender need to be created and collated. The tender should contain everything
the potential suppliers need to know to let them provide a full response.
Team work is important when creating a tender. It is unlikely that a procurement
professional will know the full details of everything required. It is important to
engage with the research and development department to obtain drawings and
specifications, to work with the finance department to understand the ideal
payment terms, and to consider the needs of the operations department. It is
important to think about things such as the quantities of products that can be
received into the stores at any one time, and the type of packaging that would
be preferred.
The tender document must outline the desired format and deadline for responses.
When all the information is collated and checked, the second stage can begin.
When processing the tender document, it is important to treat all potential

suppliers the same, so the tenders need to be sent out at the same time.
It is possible the potential suppliers may ask questions or seek further clarification
on some areas. Questions can be answered if asked and any suppliers asking the
same question must get the same answer.
Once the deadline has arrived, you gather the received tender responses or
bids from the suppliers. Any responses that arrive after the deadline should be
disregarded.
A time needs to be agreed internally within the buying organisation to review
the tender responses. A cross-functional team is the ideal way to review them.
This gives several different views on the responses and makes sure that all
departments are involved in the process.
Evaluation is the third stage of the process. In this stage, the tenders are evaluated
and reviewed and the supplier who has produced the best offer is chosen. The
best offer is not necessarily the cheapest.
Choosing a tender
An organisation that manufactures bread has prepared
and processed a tender.
The tender is for the cleaning of the bakery after the
bakery has completed its daily work.
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CHAPTER 2 The components of contractual a g r e e m e n t s - - - - - - - - - - - - - - - - - - -- - - -
The tender sets out what is required and lists the

specification, which includes how many cleaners are
needed, how many hours they will work, what cleaning
products they will have to use and supply, and what
clothing they have to wear.
After evaluating the tender responses, two suppliers are
in line to be awarded the contract.
Claud's Cleaning can meet the criteria exactly and would
charge $900 per month to supply the bakery.
Claud's cleaning has been in operation for over 10 years
and has an excellent reputation. Many of the local
businesses near the bakery use the service. Claud has a
large amount of cleaners working for him and also has
strong links with a reputable agency that supply staff at
short notice to cover illness and holidays.
Clara's Cleaning can also meet the criteria and would
charge $800 per month to supply the bakery.
Clara's business has been in operation for under a year.
There has been a recent article in the press about a
bakery they were contracted to being closed down due to
poor kitchen hygiene.
Apply
Consider the case study. Which of the tender responses would
you award the contract to?
Once a decision has been made on which supplier has been successful, the
procurement professional needs to award the contract.
The tender document that was sent out to suppliers is the invitation to treat. The
bid or tender proposa l sent back to the buyer is an offer. Therefore, until the
buyer has communicated acceptance to the successfu l supplier, agreement has
not yet been reached .
Check
List four ways that a buyer can communicate acceptance.
With this is mind, it is possible for the buyer to negotiate areas of the bid if they
decide to. Therefore, tender bids can be different to the final signed contract.
However, when preparing a tender bid, the suppliers must be sure that they can
fulfil the tender exactly as in the bid. If the buyer accepts that tender in its exact
form, the supplier cannot change their offering.
Once the contract has been signed with the successful supplier, the other
suppliers that did not win the t end er process should be informed. It is good
practice to send them a letter explaining why their bid was unsuccessful.
Quotations
A bid or response to a tender invitation is a form of quotation, but gene ra lly
quotations are received as a response to a request for quotation (RFQ).
72
Quotations are usually used for less-complex supply requirements and are more
informal in their process. z
Quotations are often used to explore the commercial offerings from current or
within the market place.
When a buyer sends out an RFQ, it is important that all the relevant information Suppliers that may
is included, as follows. wish to work with
a buyer or who a
• Specification • Quality buyer may wish to
work with
• Quantity • Delivery details
Quotations are not usually governed by a deadline, so all can be compared as and
when they are received.
Suppliers can interpret the RFQ how they wish and provide their quotation as a
proposal that they think will be attractive to the buyer. The supplier can choose
how many products go in a box, or what type of packaging the products can be
delivered in. RFQs give suppliers an opportunity to provide their best offering,
taking into account many variables.
Quotations are commonly sent on the supplier's own headed paper in a format of
their choice.
Buyers are likely to review quotations on the following criteria.
Price
Lead time
• How long the price is valid for
Unlike tenders, quotations are not open to negotiation. The quotation is the best
option a supplier can provide.
The same as a bid, the quotation is the offer in response to the buyer's RFQ,
which is the invitation to treat. Until the buyer has accepted the offer, no
agreement is made.
Table 2.9 shows the main differences between a tender and a quotation.
Document sent out to invite bids Response to a request for quotation

(RFQ)
Formal Informal
Suppliers are often pre-evaluated Suppliers not usually pre-evaluated
Most common in public sector Most common in private sector
Response in set format Response in supplier's own format
Can be negotiated Cannot be negotiated
Standard, regularly-used products or

Complex products or services
services
High-value products or services Low-value products and services
Table 2.9 Differences between tenders and quotations
73
CHAPTER 2 The components of contractual agreements---- - - - - - - - - - - - - - - - - -- -
Remember
Make sure you understand the differences between tenders
and quotations.
The documents that comprise a contract

As you have learned, contracts contain a lot of info rmation, and it is important
that this information is correct to ensure the contract runs smoothly.
A contract should include the following documents.
• Specification
• Key performance indicators
• Contractual terms
• Pricing information
• Schedules
Fit for purpose Procurement's main purpose has often been described as obtaining the best
The product or quality products and services, that are fit for purpose, that conform to the
service is capable of required specification, for the lowest price. As discussed earlier in this book,
doing what it was
designed to do simply sourcing the lowest price option is not always the best approach, but a
clear specification is indeed critical to the contract.
Specifications
In chapter 1 you learned about what can be included in a specification. In this
section you w ill understand in more detail the importance of specifications in
contracts.
Specifications need to fulfi l five key roles to be effective, outlined in table 2.10.
What is really needed? What does it need to

Define the requirement
do? Involve all stakeholders.
Inform suppliers what is needed. Do not be

Communicate the requirement too specific if not necessary. Let the suppliers
use their expertise to offer a solution.
Clear definition to minimise risk and

Reduce risk and cost
unnecessary costs.
Put controls in place to evaluate qua lity or

Enable quality to be assessed
non-conformance.
When the same thi ngs are procured from

Be consistent various sources, this ensures all are of the
same standard.
Outcome-focused
specification
Type of performa nce Table 2. 1O Roles of specifications
specification
that describes
There are two types of specifications; performance (or outcome-focused)
the functions or
performance that a specifications and conformance specifications. Performance specificatio ns are
product must fulfil shorter and less complex than conformance specifications.
74
A performance specification outlines what the product or service is to do or

achieve. This covers its output requirements, tolerances, and functions it may
have to perform.
For example, a performance specification could ask a supplier to supply three
litres of a liquid that is clear, that humans can drink safely, and that boils at 100
degrees centigrade.
Most suppliers would consider supplying water.
A conformance specification details exactly what the product or service will be made
up of. The supplier will not necessarily be aware of what the product will be used for
or how it will be used. This information is not needed: the only important factor is
that the supplier offers a product or service that conforms to the specification.
Apply
Describe a product that would be suited to a performance
specification and one that would be suited to a conformance
specification.
There are several advantages and disadvantages of the different types of

specifications outlined in table 2.11.
Short document Long document

Simple to prepare Difficult to prepare
Cheap and quick to prepare Costly and timely to prepare
Allows suppliers to innovate No supplier innovation
Allows supplier competition Limits supplier competition
Table 2. 11 Performance versus conformance
Key performance indicators (KPls)

Key performance indicators (or KPls) often feature in contracts.
KPls are used to monitor the performance of a supplier and are usually set against
specific targets.
KPls are ntitati11e and have to be able to be measured.
Measured in terms of
quality
Shop-floor employees satisfied with Measured in terms of

Number of late deliveries numbers or quantity
production schedules
Products packed in quantities as per
Achieved ISO accreditation
specification
Table 2. 12 Examples of KPls
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CHAPTER 2 The components of contractual a g r e e m e n t s - - - - - - - - - - - - -- - - -- - - - - -
Within a contract, buyers can insert KPls that the suppliers must try hard to
achieve. During supplier review meetings, these KPls will be d iscussed and used
to judge the supplier's performance.
Apply
A buyer at a factory that manufactures bicycles, Pedal Power Ltd,
is setting up a new contract with a new supplier to supply wheels.
The factory has to keep its production running 24 hours a day,
five days a week, to achieve the demand on its order book.
Due to how the factory is set up, the wheels have to be
delivered on wooden pallets that contain twelve boxes of
wheels. Each box must contain eight wheels and all wheels in
each box must be the same size.
Each box must be clearly labelled with the part number of the
wheel so that the stores department can place the deliveries in
the right area of the factory.
Deliveries can only be accepted between 07:00 hours and
10:00 hours, Monday to Friday.
Considering the case study, what KPls should the buyer set
when setting up the new contract?
Using KPls in a contract can give many benefits. Benefits can include the following.
• Improved supplier motivation
• Improved communications
• Improved relationships
• Sharing of common goals
There are also some downsides to using KPls. These can include the following.
• Reduction in quality by suppliers rushing to meet quantitative KPls.
• Less focus on collaboration as suppliers focus on their own KPls instead of
common goals.
Contractual terms
All contracts include terms that must be adhered to.
Terms in a contract state what each party understands to be their rights and
Obligations obligations throughout the duration of the contract.
In terms of a contract,
the actions that each Terms include the offer or the counter offer that was suggested, both of which
party must carry out become legally binding at the point of acceptance.
Contractual terms cannot be changed once t he contract has been agreed, so it is
important to discuss these to gain f ull understanding before acceptance.
As you learned in section 2.1, contracts can be standard or specific.
Check
Which style of contract has the same terms all the time and
which style of contract has bespoke terms?
76
There are two types of terms within a contract: express terms and implied terms.
/
2.3
Express terms can be anything that has been agreed between the two parties
during contract negotiations. These terms are specifically written into the contract.
An example of an express term is the price that has been agreed between the
buyer and the seller. This is specific to the contract.
Implied terms are terms that are assumed to exist, linked to common law. These
terms do not have to be mentioned in the contract. By law they are present even
if not shown. In England, for example, all contracts involving the sale of tangible
items are governed by the Consumer Rights Act 2015 (previously known as the
Sale of Goods Act 1979).
Remember
There are two types of terms:
• Express terms
Implied terms
For specific contracts, the terms are clearly set out and agreed between the
two parties.
For standard contracts, the buyer's organisation often has their business terms on
the purchase order sent to the supplier. Frequently, in business, organisations find
themselves in a battle-of-the-forms situation where the buyer and the supplier
compete to use their own standard terms.
Consider the scenario in figure 2.10.
At this point, if the

supplier processes
the order and
delivers it, the
terms of the buyer
have been accepted.
The supplier will
A buyer sends an
respond to the
enquiry to their The buyer places
enquiry with written an order using
supplier on their
details of price,
headed paperwork, their organisation's
availability and
which contains their standard purchase
delivery. The order, which
standard terms.
supplier states that contains their
The buyer states If, however, the
this relates to their
that their RFQ terms - this is supplier sends
standard terms -
relates to their buyer's offer. back an order
this is an invitation
terms.
to treat. confirmation, which
is on their headed
company paper
containing their
standard terms,
this is a counter
offer and their
terms supersede
the buyer's.
Figure 2. 10 Battle-of-the-forms scenario
77
CHAPTER 2 The components of contractual agreements------ - - - - - - - - - - - - - - - --
There have been many legal cases relating to the battle of the forms.
A legal example of battle of the forms

Butler Machine Tool Co Ltd v. Ex-Ce//-0-Corporation (1979).
Butler offered a sale based on their standard terms.

Ex-Cell-O placed an order that used their standard
terms. Ex-Cell-O's order had a tear off slip on the
bottom, which they required the supplier to return in
acknowledgement of the terms. Butler returned the
slip. The court rules in Ex-Cell-O's favour because Butler
had returned the slip, so they were deemed to accept
Ex-Cell-O's terms.
To understand the basic concept of the battle of the forms, it is fair to say that
the last document sent containing terms and conditions is the one by which the
contract will be legally bound.
Pricing information
It is critical that a contract contains the pricing as agreed between the buyer and
the supplier.
The contract shou ld clearly state the currency that the price has been agreed in,
what taxes are applicable, who is respon sible for carriage costs and insurance, and
when payment is due.
The main body of the contract should conta in a brief overview of t he pricing
agreement, which refers to a more detailed explanation in the pricing schedule
Pricing schedule appendix.
appendix
Additional pages, For example, it could state: "The price of the goods is as per Appendix 1. No
containing more amendments to t he price wi ll be accepted w ithout negotiation and agreement."
details about the
pricing schedule,
at the end of the Schedules
contract
As you learned above, a contract may have an appendix that details the pricing
further. Within this appendix, the pricing strategy that was agreed must be included.
If the agreement is fixed pricing, t hen details on the price and the duration of the
fix must be explained.
If the pricing is variable, the appendix must detail acceptable tolerances or a
minimum or m aximum price.
If the contract is for lump-sum pricing, the appendix must deta il what is in clud ed
in the lump-sum pricing. If there are to be staged payments within the lump-sum
prices, dates and amounts must feature.
If a schedule of rates is relevant then this must be included in full.
Reimbursable pricing must detail what costs are covered and whether the fee
payable is a percentage of costs and, if so, what t hat percentage is. If there is a
fixed fee, this must be clearly stated.
Finally, if the pricing is risk-and-reward, the appendix must detail what is being
offered at what cost and what will be chargeable if the contract delivers what it
sets out to.
78
Check
Can you remember the definitions of these terms?
• Fixed-cost pricing • Schedule of rates
• Variable pricing Reimbursable pricing
• Lump-sum pricing • Risk-and-reward pricing
r
As you have learned, contracts can be for goods or services.
The basic rules apply regardless of whether a buyer is negotiating a tangible or an

intangible contract.
Everything you have learned in this section is relevant for both types of contract
but, as explained, some contracts work better with different strategies.
Taking into consideration what we have covered, an informed decision can be made
by a procurement professional as to which style of pricing, which terms, and what
KPls would be best for the organisation.
l?.e1nen1ber
These are the key components to consider when deciding on a
pricing schedule in a contract.
• Type of work • Risk
• Supplier relationship Financial position
• Involvement
Apply
Write a contract for the supply of an item to a manufacturer.
Consider all the factors you have learned about, and ensure
the contract covers all areas and keeps to the same style
throughout.
Chapter Summary
Contracts can come in many forms and include various pricing arrangements.
Each contract has a place within business and its own advantages and
disadvantages in different contexts.
In order to reach the stage in business where a contract is formed, quotations
and tenders are required. You now understand the difference between a
quotation and a tender and how each are used within organisations.
79
CHAPTER 2 The components of contractual a g r e e m e n t s - - - - - - - - - - - -- - - - - ------

0 Identify what type of pu rchasing is used to buy one-off or immed iate
req uirements, and is frequently used within domestic purchases.
a. Fixed c. Spot
b. Variable d. Target
f) Identify what ITT could stand for. More than one may apply.
a. Invitation to tempt c. Invitatio n to trick
b. Invitation to tender d. Invitation to treat
8 Ident ify which three elements must be present for a contract t o be va lid.
a. Intention, consideration, agreement
b. Intention, contemplation, agreement
c. Interrogation, consideration, agreement
d. Interrogation, contemplation, agreement
80
CHAPTER3
After completing this chapter you will understand

sources of information on suppliers and customers.
Chapter overview
Explain the use of the Internet to locate details about suppliers
and customers
• The use of Internet search engines to locate details about suppliers
and customers
• The types of information presented by suppliers and customers on
their websites
• B2B and B2C e-commerce
Explain the use of credit rating agencies
• The role of credit rating agencies and credit rating scores
• Publications on individual organisations and markets
• The use of credit rating scores
Describe systems used in procurement and supply
• Systems for purchase ordering
• Capturing data on expenditure
• The use of portal sites to locate suppliers or customers
• Examples of supplier database systems
Introduction
Information is readily available for buyers to locate details on their suppliers and
customers. In this chapter you will learn about how to research such information.
In order to make an informed decision prior to agreeing contractual terms it is
important to check a supplier's financial status. This can be done by using a credit
rating agency and in this chapter you will learn how this happens. Procurement
has a variety of systems that are used for ordering and capturing data as well
as for holding details on suppliers. In the final part of this chapter you will learn
about these systems and how they fit into the procurement function.
81
CHAPTER 3 Sources of information on suppliers and c u s t o m e r s - - - - - - - - - -- - - - - - ---
e Explain the use of the Internet

to locate details about suppliers
and customers
Within industry today there are many systems to enable procurement
professionals to research suppliers and customers. It was not that long ago that
procurement relied on a very different set of tools to obtain information.
Historically, in order to find the information that was needed, procurement teams
had to do the following.
• Use supplier and customer publications such as journals and catalogues
• Refer to supplier directories
• Send letters to request references
• Visit organisations where data was stored to conduct resea rch
Nowadays, access to information is much easier and quicker.
The use of Internet search engines to locate

details about suppliers and customers
As you learned in chapter 1, it is critical to eval uate suppliers. The same applies for
customers. Thinking back to the supply chain, it is important that all links in that
chain function. If the supplier cannot supply, the custo mer will not get their goods
or services.
Figure 3.1 shows how all parties in the supply chain come together: raw m aterials
provider, a processing plant, a manufacturer, distribution, reta iler and consumer.
Processing plant
Raw materials
Manufact uring
it
Consumer
DODO O
DODOO
D ODOO
DO OD
Mall
Retailer
Figure 3. 1 Supply chain
82
- - - - - - - - - - - - - - - - - - - - - - C H A P T E R 3 Sources of information on suppliers and customers
Each one of these organisations, except the raw material provider and the
consumer, is both a supplier and a customer.
The processing plant in the diagram is a customer of the raw materials provider
and a supplier to the manufacturer.
The manufacturing organisation is a customer of the processing plant and a
supplier to the distribution company.
The distribution organisation is a customer of the manufacturing organisation and
a supplier to the retailer.
Finally, the retailer is an indirect customer of distribution, a customer of the
manufacturer and a supplier to the consumer.
There may not always be money exchanged directly between all the links in
the chain but all links are important and are reliant on each other to reach
the end goal.
Consider the distribution. Although they are a supplier to the retailer, the
retailer may not pay the distributor. It is likely that the manufacturer has
contracted the distribution company to deliver on their behalf. The retailer will
pay their supplier (the manufacturer) an agreed price, which includes the cost
of distribution.
The above example gives you an idea of why it is important for a procurement
worker to understand the links in the supply chain. To be able to fully understand
the organisations being worked with, research is required. This is where the use of
the Internet and search engines is beneficial.
The Internet
The Internet can be used for business and recreational activities and has become
very important in organisations.
In today's technological world, the Internet can be accessed from computers,
laptops, tablets and smartphones. Information is never far away and hence
procurement professionals are usually able to find out information as required.
Search engines
According to the Oxford English Dictionary a search engine is 'a program that
searches for and identifies items in a database that correspond to keywords or
characters specified by the user, used especially for finding particular sites on the
World Wide Web.'
Globally-known search engines include the following.
Google, which is Mu
In or using several
• Yahoo, which is multilingual different languages
• Sogou, which is Chinese
• Badai, which is in Japanese
Bing, which is multilingual
search engines do you use in your organisation?
83
CHAPTER 3 Sources of information on suppliers and customers-- -------------------
Locating information
When researching suppliers or customers, there are ma ny types of
information that can be found. Thinking back to supplier evaluation, the list
of topics to investigate before approving a supplier is vast. Ta ble 3.1 outlines
what to research .
Could the supplier cope with the order?

Capacity
Do they have the machinery, staff and skills to do it?
Does the supplier cause lots of pollution?

Environmental policies
Do they dispose of their waste correctly?
Does the company look to be performing well?

Financial stability Do they have any bad debts?
What is t heir cred it rating?
Is the supplier based in the same country?

Location Can the supplie r manage the logistics of deliveri ng
the goods?
Does the supplier have a good reputation?

Reputation Are there any rumours about the supplier that need
Impartial
Open-minded, investigating?
without pre-
determined ideas,
and taking all views Table 3. 1 Researching suppliers
into account
Corporate social Using a search engine, a procurement professional can conduct Impartial research.
responsibility
(CSR) To research 'capacity' using a search engine, the procurement professional could
A business approach type in the supplier's name and this would most likely bring up their website or
that contributes social media sites.
t o sustainable
development by By reading these and looking at photos of the business, the buyer would
delivering social, be able to get an understanding of the size of the operation and what they
environmental and
economic benefits
produce. Some organisations list their machi nery and what they can produce
for all stakeholders. on their pages.
The CSR policy may
Search engines also give researchers the opportunity to click on images, news
cover fund raising for
charity, ethical articles or m aps in response to the words entered. You will learn more about this
further on in this section.
Ethics
Principles that From the supplier's online presence, the buyer may be able to rea d the supplier's
govern a person's corporate social responsibility (CSR) policy.
or an organisation's
behaviour A CSR Policy is a document written within the organisat ion, which is regulated
Sustainability internally, and contains information on how an organisation will be a responsible
Supporting future part of the community, both locally and globally. The poli cy covers fundraising for
ecologica l balance charity, ethical behaviour, sustainability and environmental policies.
by not harming the
environment or CSR policies often outline charities that the organ isation supports, ways in which
depleting natural they are helping to protect the environment and promises they have made t o help
resources
the loca l community. A strong policy aims to boost buy-in from stakeholders and
helps to ensure the organisation is seen in a positive light - one with which other
businesses will want to build long-term relationships. Reading an organisat ion's
84
- - - - - - - - - - - - - - - - - - - - - C H A P T E R 3 Sources of information on suppliers and customers
CSR policy will help the buyer understand if an organisation is focused on

environmental issues, is playing a positive part in society and would fit in with the
needs and strategies of their business.
Figure 3.2 outlines what could be covered in a CSR policy and how it may be
displayed on a website for ease of reading.
Cultural
Sustainable Employee
Reducing carbon Employee and
resource input in Philanthropy Eco-responsibility
footprint wellbeing ethical
management decisions
diversity
'Sorting and recycling • Career management • Business ethics charter

• Public transportation •Skills development • Sustainable development
• Compensation • Diversity charter •Adhesion to 'Global Compact'
• Collaborative work •Training plan
Figure 3.2 CSR policy (Source: www.nexialog-cg.org)
If the person conducting the research was looking specifically for the
organisation's CSR policy, they could type 'company X CSR policy' in the
search engine and select 'images'.
Gocigle I company x csr policy

···•··········
All Images Shopping Videos More Settings Tools
Figure 3.3 Google search diagram (Google and the Google logo are registered
trademarks of Google Inc., used with permission)
Figure 3.3 shows how this would look using Google. This approach would quickly
display any images of the CSR policy that featured on the Internet. This can be
used to look for anything that may involve an image and will save time by not
having to go through the whole website.
In relation to financial stability, an organisation may detail their profits for the last
few years online. Any investments they have made may feature in news reports.
By using a search engine and typing in words such as 'company x invests', any
related articles would be listed, which could show that the organisation appears to
be doing well.
The location of an organisation is easily found online. Most company websites

contain a map that links to a search engine map, i.e. Google Maps, so the viewer
can easily see where the organisation is located. The researcher can also put
the postcode or the address of the organisation into the search engine and
select 'maps'. This generates a range of images that shows the location of the
organisation. Views can be as close as a photograph outside, to a street view, and
even a full global view. Global organisations often have a map that shows all of
their sites across the world.
85
CHAPTER 3 Sources of information on suppliers and customers---- - - - -- - - - -- - - - - - --
Figure 3.4 shows the global locations of CIPS.
Figure 3.4 CfPS global map 2018
An organisations' reputation can be discovered and understood from their website.

Websites often conta in testimonials from customers or suppliers or there is an
area for people to leave f eedback. Th is can be positive or negative and shows how
the organisation is perceived.
Testimonial
A formal statement
Testimonials that contain the names of people who wrote them or t hat are
from a customer delivered by a well-known personal ity are seen to be more credible. When
giving feedback design ing an advertisi ng campaign orga nisations often use celebrity testimonials
about the product, wh ich will be more persuasive and increase awareness. Figure 3.5 is an example of
service or company
a celebrity testimonial.
and often used
for promotional
purposes "Thank you lntraceuticals.
When constantly travelling
I get dehydrated and
lntraceuticals is an
absolute necessity to
replenish my skin."
Naomi Campbell
Supermodel
intraceuticals
it's in the skin
Figure 3.5 Example of a testimonial
Most reputable businesses, these days, will have a website. If they do not then
typing t heir name an d any key words into a search engine wi ll bring up any
information on them that is on the Internet.
86
Researcl1ing a supplier on line

David, a procurement professional, has been tasked
with setting up a contract with Wheels & Co. Wheels
& Co are a very small, family-run business that have a
factory not far away from David's organisation.
David's procurement manager met with Wheels & Co at a
recent trade show and was impressed with the products
they manufactured and agreed to send them an RFQ.
In keeping with the company policy, David has to
research Wheels & Co to understand whether they are a
supplier that would be acceptable to work with.
The first thing David does is go on line and type 'Wheels
& Co' in a search engine. No website comes up.
In order to research the supplier online, David now has

to select key words to put into the search engine to
try and find out as much information as possible from
associated web pages, news articles and social media.
Apply
What words could David enter into the search engine to try and
find out as much information as possible about Wheels & Co?
If the person conducting the research is looking for some very specific
information, then a more thorough search on the website may be required.
Organisations upload various types of information, which is not always easy to see
from the home In the next section you will learn about these. Mame
The first page you
see when you open a
website
As you have learned, organisations can present a wide range of information on

their websites for potential customers or suppliers to evaluate.
In this section you will learn, in more detail, about the types of information
presented on websites.
One of the most important types of information to feature on a website is the
organisation's contact details. The name of the business, including its full trading
title, should be presented. The information will show what type of business the
organisation is.
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CHAPTER 3 Sources of information on suppliers and c u s t o m e r s - - - - - - - - - - - - - - - - - - - - -
Contact details should also include the telephone numbe r, the fax number (if still
appl icable) and an e-mail address. If the website is designed to inform potential
suppliers or customers about the offeri ngs, it is imperative that the target
audience can get in touch.
A contact form enables visitors to the site to ask a question, or send an RFQ or
Target audience offer to the organisation. The forms are forwarded to the organisation, and the
People or sender usually receives a response, in an agreed amount of time, which is stated
organisations at
on the bounce back e-mail.
which products
such as a film, The location of the organisation should be shown. As explained earlier in this
advertisement or section, this could be presented as a map. The full address should also be deta iled
website is aimed
so potential suppliers or customers can conduct further research if required.
Bounce back
An automated e-mail The website will co ntain an introduction to the organisation. The purpose of
sent in response to an this is to explain to the target audience what the organisation does, a little
e-mail or contact form about how long they have been trading, how they were formed and maybe their
mission or vision statement. This type of information is often referred to as the
'About Us' section.
Photographs of the factory, the shop or the people involved in the organisation
are often featured. This helps the visitor to the website to get a feel for
the organisation, see what the place of business looks like and get a fuller
understanding of the organisation.
A page on the website showing what the business produces, buys or sells is key.
It is likely that one of the main reasons somebody clicked on the website is to
find out what is available. Prices aga inst products or services can be included or
Price on sometimes information about products or services is given but states POA after it.
application (POA)
Meaning you can Putting POA on the website is aimed at encouraging the browser to get in touch
find out the price with the organisation and start to form a relationship.
when you contact the
organisation The website will contain the brand. Company logos, styles and slogans will feature
to keep the theme of the site in keeping with the organisation.
Traffic
Visits or clicks on a Links to socia l media will be visible on a website. Sites such as Facebook, Twitter,
website Linkedln and lnstagram are all used within business and aim to have as much
traffic as possible. In putting these links on the website, new visitors are made
aware of the social media activity the organisation experiences.
Some types of information on a website ca n be downloaded so the person
browsing can save it to their device for future reference. Product specifications or
drawings would be useful to download so the buyer or supplier can see exactly
what is required . These documents could be used as part of a tender or an RFQ.
In order to attract people to use the products or services, some organisations put
vouchers or offer codes on their websites. Vouchers can be downloaded and used
at a later date. Discount codes can be copied and pasted. These are often seen on
websites that offer an instant purchase. Consider buying a print of a photograph.
The price listed on t he website is $10 but the discount code "ABC20" entitles the
person making the purchase to a 20% discount. The code can be copied and
pasted, usually at the point of payment, and the discount is applied.
828 and 82C e-commerce

An example of a business-to-business relationship (B2B) is a soup manufa cturer
that buys their vegetables from the loca l farmer. This is known as a commercial
tran saction.
88
An example of a business-to-consumer relationship (B2C) is a person going into i /'

a supermarket and buying the soup that the manufacturer above has produced. 3.1
B2C transactions involve a business and member of the public.
Remember
B2B means business-to-business and B2C means
business-to-consumer.
Conducting business on the Internet is known as e-commerce. E-commerce stands

for electronic commerce.
E-commerce can involve many types of technology, including the following.
Computers
• Laptops
• Tablets
Mobile phones
• Electronic bank transfer
• Websites
EDI (electronic data interchange) - this will be covered in section 3.3
When you undertake business using e-commerce, procurement is referred
to as e-procurement. This involves the transactions happening online.
Transactions such as sending electronic requisitions, RFQs and tenders,
electronic authorising of documents and receiving goods in electronically all
relate to e-commerce.
The payment in e-commerce is also electronic, so via Paypal or a similar model in
B2C, and usually via BACS in B2B.
BACS stands for Bankers Automated Clearing Service. This form of payment is
simply a transfer of funds electronically from the buyer's account to the seller's.
The law of e-commerce is the same as the law relating to standard contracts. The
theories and examples taught in chapter 2 are relevant in e-commerce.
Check
Do you understand the following terms in relation to contracts?
Invitation to treat
• Offer
• Acceptance
1\pply
Website 1 is advertising goods for sale which can be bought at
the price stated by clicking a button.
Website 2 is advertising goods for sale but has no option for
the buyer to click to buy.
~
Contractually speaking, which website is making an offer and
which website is providing an invitation to treat?
~-~~·-·--~ .. ~~----·-"-~---"·"--"""-·~~-~.-- .. ~~--~-~·--~·-
89
CHAPTER 3 Sources of information on suppliers and customers--- - - - - - - - -- - - - - - - - -
Electronic signatures
Electronic signatures are accepted in the eyes of the law. Contracts that are
exchanged electronically can have electronic signatures to confirm authenticity
and acceptance.
Explain the use of credit

rating agencies
As you have learned, evaluating potential suppliers is very important to ensure
the supply chain continues to perform and meets its goals. One area within the
supplier evaluation process is financial evaluation. In this section you will learn
about what a credit rating is, how it is undertaken and the benefits it provides.
The role of credit rating agencies and

credit rating scores
Credit rating
A credit rating is a score given to an organisation based on the amount of risk they
pose to the creditor.
For example, as a supplier, what risk is there that you wou ld be left with an invoice
unpaid by your buyer?
It is important to understand if the business you are dea ling with, or intend to
deal with, is financially stable. Thinking about the supply chain, which you learned
about in chapter 1, if one link in the chain is not financially sound the who le
process could fai l.
Figure 3.6 shows a situation where there is no process ing plant in between the
raw materials and the manufacturing because they have been affected by debt.
The processing plant has not been able to pay the raw materials company. The
manufacturer does not receive its products and the retailer cannot sell them.
Raw materials Manufacturer Distributor Retaile r Consumer
Figure 3.6 Supply chain failure
By evaluating the financia l position of an organisatio n with the hel p of a credit

rating agency, the chances of a business finding itself in a situation where it is
owed money, or it ca nnot get its supp lies, are reduced. However, the risk can
never be completely eliminated.
A credit rating agency's role, in a commercial environment, is to assign or ge nerate
a rating that shows how likely it is that an organisation is able to afford to pay their
90
debts in a timely way and without defaulting. An organisation owing money to

another organisation is referred to as a debtor.
Defaulting, in this situation, is when an organisation fails to or cannot meet its
financial agreement with their creditor. A creditor is the organisation that has
financed a deal and is owed the money from the debtor.
l?enu;1nber
A debtor owes money
A creditor has money owed to them
A credit rating agency is an impartial and independent body that holds

information about both businesses and consumers.
When a procurement professional carries out a supplier evaluation, a credit
rating check could be done. A credit rating agency would be contacted by
the procurement professional and supplied with the following relevant
information.
• Company name
Company address
Credit rating agencies hold lots of financial information about organisations. When
they are compiling the score they take the following into consideration.
• Credit limits with other organisations
• Trade payment history
• Profit and loss statements
• Turnover
• Shareholder funds
• Court judgements
limlt5 are the amount of credit that an organisation has been approved for Credit limit
in a trading relationship with one of their suppliers. The amount
of money an
If an organisation has a lot of credit accounts with suppliers and the values are organisation can
high, it would suggest the organisation has a good cash flow and is trusted within borrow from a
creditor
the industry.
Revenue
Trade payment history looks at whether the organisation has paid their creditors The amount of
on time, and in full, in accordance with the terms of their agreement. Payment income that has
terms can be, for example, 30 days from month end. If an organisation has a good come into a business
trade payment history, the credit rating agency will establish that they have been Costs
paying all their invoices from their creditors on time. The amount of
money that has gone
A profit and loss statement is a document produced by a trading organisation out of the business
to show its financial outcome at the end of a year including revenue, costs
and profits.
~total revenue - CO>ts
91
CHAPTER 3 Sources of information on suppliers and customers---- - - - - - - -- - - - - - - - - -
Figure 3.7 shows a basic profit and loss statement, also known as an
income statement.
Example Corporation
Income Statement
For the year ended December 31, 2017
Sales (all on credit) $500,000

Cost of goods sold 380,000
Gross profit 120,000
Operating expenses
Selling expenses 35,000
Administrative expenses 45,000
Total operating expenses 80,000
Operating income 40,000

Interest expense 12,000
Income before taxes 28,000

Income tax expense 5000
Net income after taxes $ 23,000
Earnings per share $ 0.23

(based on 100,000 shares outstanding)
Figure 3. 7 Basic profit and loss statement
Credit rating agencies have access to these and use them to help prod uce the
rating score. In the example, the net profit (also called net income after taxes or
'the bottom line') is shown as $23,000, suggesting the organ isation has performed
well. This wou ld go towards raising the credit score. If the profit and loss
statement end figure was negative, it would suggest the business is not doing well
so could go towards reducing the overall score.
Turnover When assessing credit ratings, turnover will be ta ken into account. If a business
The amount of has a high turnover and a good profit, this would suggest a strong position is held.
money taken by
If a business has a high turnover and a low profit, or they make a loss, this would
a business in a
particular period be a bad position and cou ld reduce the overall credit score.
Assets Shareholder funds, also referred to as net worth, is calculated as follows.

The value of
everything an Shareholder funds= organisation's net assets - net liabilities
organisation owns A good credit rating score would be given if the shareholder funds were a positive
Liabilities number, as the organisation would own more than they owe.
The amount a
business owes, In England and Wales a County Court judgement (or CCJ) is a court order that may
e.g .. loans, debts, be served against a business for failure to pay their creditors. (Other countries
accounts payable have sim ilar national systems). If CCjs feature on an organisation's records it might
mean they have financial problem s t hat would lower their rating score.
Credit rating agencies do not make a decision for the organisations but simply
supply them with a score that can help them to make an informed decision.
The information suppli ed by the cred it rating agency is a score that can be sh own
on a diagram. There is more than one credit rating agency and all of them supply
the information in a different format. Figure 3.8 shows one way a credit rat ing
score could be presented.
92
Credit Score
650-700
Figure 3.8 Credit score (Source: www.nottinghamcu.eo.uk/)
The score shown in figure 3.8 is 'good' and therefore the procurement professional
doing the research would be reassured that their potential supplier is likely to be
financially stable, have a good cash flow and be able to pay their creditors.
It is good practice to regularly check an organisation's credit rating score, especially
if the organisation is important to the continued success or survival of the
business it works with.
i s
When checking credit scores, as you have learned earlier in this section, there are
several resources that can be used.
Credit agencies research organisations to get the information they need and this
allows them to create databases that help them to calculate credit scores.
Businesses produce certain publications that help the credit agencies. This
information is often published on a business' website in the style of a financial
report. You will learn about financial reports later in this section.
A large amount of data about businesses is held within public sector organisations
such as Companies House in the UK and Companies Registry in Hong Kong. Most
countries have a corporate registry such as this that holds important information
about businesses so that research can be done for due Due diligence
Undertaking a
Publicly available information on businesses stored at such corporate registry thorough appraisal
organisations include the following. or conducting
an evaluation to
• Basic company information establish all the facts
prior to entering into
• The nature of the business
an agreement
• Status of the company
Images of documents
• Current and resigned officers
• Disqualified directors
Previous and dissolved names
• Insolvency information
93
CHAPTER 3 Sources of information on suppliers and customers - - - -- - - - - -- - - - - - -- - --
Table 3.2 shows what is featured in the listed information in more detail.
Basic company information Company type, i.e. sole trader I limited

company I public limited company I
third sector organisation
Registered office address, contact
details and date formed.
Nature of the business What does the business do, i.e. retailer,
manufacturer, service provider?
Dissolved Status of the business Is it live or dissolved?

Ceased trading
Date of last accounts filed Date the last accounts were submitted
Officers
to Companies House or equivalent
Positions appointed
by the Board of (were they on time?)
Directors. Examples
of officers are CEO
Date next accounts are due Date the next set of accounts should
(chief operating be submitted to Companies House or
officer) and FO equivalent
(financial officer)
Images of documents PDFs of the profit and loss accounts,
Insolvent
Unable to pay the balance sheets, etc.
money owed
Current and resigned officers A list of people currently working as
officers and those that have resigned
Disqualified directors Anyone who has been removed as a

director for not meeting their legal
requi rements. Wrongful trading, unfit
conduct and bankruptcy are reasons for
disqualification
Previous and dissolved name search If the company has been known under
any other name previously, and if t he
company has been dissolved
Insolvency information If the company is, or has been, insolvent
Table 3.2 Information stored on companies
Financial year By considering all the above information, cred it rating agencies can start to make an
A twelve-month informed decision on how a business is performing and what score it is likely to get.
period of trading.
Businesses' financial As m entioned above, businesses often upload their financial reports to the ir
years can start at any website. They can also send them via post or e-mail to stakeholders.
time as long as they
run for a complete Financial reports are usua lly published once a year, at the end of a business'
year financial year.
Apply
In your experience, which months of the year tend to be used
by businesses as their end-of-year dates?
Outsource Financial reports conta in many documents that are prepared by the company
Contract another
accountant, finance director or finance officer. Some businesses prepare their
company to
undertake a task or report inside the organisation and some outsource it to a co mpany that is skilled
job in such work.
94
- - - - - - - - - - - - - - - - - - - - - - - C H A P T E R 3 Sources of information on suppliers and customers
A financial report contains four important documents that give a clear insight into
the business' performance.
1. Balance sheet
2. Profit and loss report
3. Changes in equity statement
4. Cash flow statement
A balance sheet is a statement that shows a business' assets, and Equity
at a certain point in time. The value of the
assets minus the
Figure 3.9 shows an example of a balance sheet. At this stage you do not need to value of the liabilities
understand all the entries but simply learn what a balance sheet shows. Liabilities
The total assets are listed on the left and the total liabilities on the right. The amount a
business owes,
As learned earlier, equity is the amount of value in the business and is e.g., loans, debts,
calculated as the value of the assets less the value of the liabilities. In the accounts payable
example in figure 3.9 the equity is $770,000 minus $481,000, which means
the amount of value in the business is $289,000.
Example Company
Balance Sheet
December 31, 2017
ASSETS LIABILITIES
Current assets Current liabilities

Cash $ 2100 Notes payable $ 5000
Petty cash 100 Accounts payable 35,900
Temporary investments 10,000 Salaries payable 8500
Accounts receivable - net 40,500 Interest payable 2900
Inventory 31,000 Taxes payable 6100
Supplies 3800 Warranty liability 1100
Prepaid insurance 1500 Unearned revenues 1500
Total current assets 89,000 Total current liabilities 61,000
Investments 36,000 Long-term liabilities

Notes payable 20,000
Property, p!ant & equipment Bonds payable 400,000
Land 5500 Total long-term liabilities 420,000
Land improvements 6500
Buildings 180,000
Equipment 201,000 Total liabilities 481,000
Less: accum depreciation (56,000)
Prop, plant & equip - net 337,000
Intangible assets STOCKHOLDERS' EQUITY
Goodwill 105,000 Common stock 110,000

Trade names 200,000 Retained earnings 220,000
Total intangible assets 305,000 Accum other comprehensive income 9000
Less: Treasury stock (50,000)
Other assets 3000 Total stockholders' equity 289,000
Total assets $ 770,000 Total liabilities & stockholders' equity $ 770,000
The notes to the sample balance sheet have been omitted.
Figure 3.9 Balance sheet
95
CHAPTER 3 Sources of information on suppliers and customers---- - - -- - - - - -- - - - - - - -
The balance sheet shows the credit rating agency whether the business has a
value or not.
The profit and loss statement, as learned earlier in this chapter, shows whether a
business has made a profit.
Check
Can you rem ember the formula for calculating profit?
Changes in equity statem ents show the changes in the shareholders' equity for
the reporting period. There are two changes that could occur in shareholders'
equity.
Dividend 1. Shares could be bought or sold, or new shares issued; dividends could
Money paid from the be paid.
company's earnings
to the shareholder 2. Net income could change, assets could be re-valued or investments sold.
A cash flow statement is a document that shows the amount of cash going into
and leaving a business. Figure 3.10 shows an example of a cash flow statement.
Cash Flow Statement

For the year ended December 31, 2017
Cash Flow from Operations

Cash receipts from customers 86,772
Cash paid for inventory (7400)
Cash paid for salaries (53,000)
Net Cash Flow from Operations 26,372
Cash Flow from Investing

Cash receipts from sa le of property and equipment 13,500
Cash paid for purchase of equipment (17,500)
Net Cash Flow from Investing (4000)
Cash Flow from Financing

Cash paid for loan repayment (5000)
Net Cash Flow from Financing (5000)
INet Increase in Cash 17,3721
Figure 3. 1OCash flow statement
The final amount (i.e. the net increase in cash) shows whether the business has
more or less cash at the end of the year than at the start. The amount of cash
in a business is important but does not mean the business will make a profit
or give a full view of the financial situation . It is important to also consider the
balance sheet and profit and loss statement, and this is what the credit rating
agencies do ..
96
Remember
Having a positive cash statement does not mean the business
will make a profit
As you have learned, the financial report usually includes all four of these
documents. It often includes an overview about the financial performance over
the last financial year. A statement from the CEO is often included before the
main statements. This statement may link to the business' mission statement to
show how they are achieving their goals. At the end of the report is a summary
or conclusion, which explains any future investments the business is planning or
major changes that are coming into force. The report should be a document that
gives reassurance to the stakeholders and shareholders within the organisation
that their investment or interest is a positive thing.
Evaluating suppliers using a credit rating agency

Mr Patel is looking for a new company to supply
his business, Authentic Asian Food, with the plastic
containers he would like to sell his food in. Mr Patel has
shortlisted two companies that he thinks could supply
what he wants.
• Plastic Fantastic
• Container & Co
Mr Patel contacts a credit rating agency to obtain
credit scores.
The agency discovers the following information.
Plastic Fantastic's profit and loss statement shows a good
net profit, their balance sheet shows their assets are
significantly higher than their liabilities and their cash
flow statement shows a large growth in the amount of
cash in the business against the previous year.
Container & Co shows a very small net profit on their
profit and loss, and their balance sheet shows that they
have very few assets and a high number of liabilities.
Their cash flow statement shows a drop in cash in the
business by over 40% against the previous year.
Which of the two businesses would get the best credit
rating score, and which business should Mr Patel choose
based on this information?
Market publications, in contrast, contain more general information about how the
market of a particular area of the economy is performing financially.
Stock exchanges, for example, produce information that shows how share prices
are rising or falling. Market trends often state that shares within the same type of
industry follow each other, so, for example, if shares in banks dropped, it would be
fair to say that all financial businesses would follow suit.
Other market publications exist, such as ones aimed at certain commodities. Using
metal as an example, there is an organisation called LME, London Metal Exchange.
97
CHAPTER 3 Sources of information on suppliers and c u s t o m e r s - - - - - - - - - - - -- - - - -- - -
This organisation is a global centre for trading metals. Within this organisation
there are publications rele ased that show what the market is doing, the prices that
metals are being traded at and the stock exchange prices. A credit agency checking
a score on a business could use such publications to see how strong the industry
is at a particular time. If the industry is booming, the business being checked has
more chance of doing well and being profitable. If the industry is crashing, then
this could be ca use for concern.
The use of credit rating scores

As yo u have learned throughout this section, credit rating scores take into
account a lot of information about the business and the ind ustry the business
operates in.
From a procurement perspective, using credit scores can help make informed
decisions as to whether a supplier would be a good choice or not.
Using the score is important, but there are also other factors to take into account.
• Is the business new?
• If the business has changed its name, why?
If the business has just formed, it is likely to have a low credit rating as it may not
have filed any financial statements yet. In this situation the business could be
excellent but just not have a history.
If a business has changed its name, this will also reflect negatively on the credit
rating. There could be a genuine reason for the change, so it is worthwhile finding
out why this has happened.
To summarise, credit rating agencies play a ve ry important role in helping
procurement professionals make informed decisions on which suppliers are
financially strong. By combining the use of a credit rating agency with all the other
evaluation checks you have learned about earlier in the book, you will be able to
make an educated and informed decision on suppli ers.
App ly
You work in the procurement team for a car manufacturer.
Your supplier of windscreens has shut down. List the various
ways you would evaluate potential new supp liers.
Describe systems used in

procurement and supply
Within procurement, as in most functions, the re are a variety of systems used in
order to ensure the process is effect ive and efficient.
Most, if not all, of these are electronic and include systems to place ord ers,
capture data, locate suppliers or customers, and hold information.
98
Placing purchase orders is fundamental to the running of the procurement

department.
Within production or manufacturing organisations, the procurement function
often uses an MRP system. MRP stands for material requirements planning.
This electronic system is used to plan production, which includes scheduling
orders, monitoring inventory and managing the production process.
An MRP system has three main objectives that tie in with how an ideal
procurement department should work.
1. To ensure that the parts or materials needed for manufacturing the end
products are available
2. To plan production, establish when to place orders and schedule deliveries
3. To keep inventory value as low as possible
An MRP system works based on the demand for the end product, or the product
that the organisation manufacturers.
The sales team enters the sales orders, which generates a demand for something
to be made. The product that is to be made will include various components or
parts. Within an MRP system, each finished product has a BOM. A BOM is a bill
of materials, which is a list of everything needed to make the product and the
quantities required.
When a sales order is added, the MRP system calculates what needs to be
manufactured. It is possible that the organisation will have some stock of both
finished goods and components in stores so the balance of what is needed to
fulfil the order will be the difference between the order requirement and the
amount in stores.
To meetthe demand of the products that need manufacturing, the MRP system
does a calculation based on the BOM of how much of each component is required.
This generates a report that the buyers can pull off the system.
Within the calculation, the MRP system will work out order quantities based on
and lead times. Minimum order
quantity {MOQ)
The MOQ is worked out through a discussion with the supplier, considering The smallest amount
what amount is cost effective for them to supply as well as what amount is cost of a product a buyer
effective for the buying organisation to stock. can order from the
supplier
Lead times include both the supplier's lead time and how long the production
Batch
process within the buyer's organisation takes. Amount of products
Purchase orders can then be raised based on the amount of components produced at a time
suggested by the MRP system. !:luffer stock
Amount of stock held
The MRP system takes away the manual work of having to calculate how many in stores at any time
items to order, and the lead time required, but for the purpose of understanding in addition to actual
try to answer the following questions. requirements
Apply
75 washers are needed to make products to fulfil a sales order.
Stores currently have 50, which includes a buffer stock
requirement of 25.
99
CHAPTER 3 Sources of informatio n on suppliers and customers--- - - -- - -- - ----------
The MOQ for the washers is 24 and batch quantities are in 12s.
The end products have to leave the manufacturing
organisation in 12 weeks. The production time to make the
washers into the end product is four weeks. The lead time
on the washers is six weeks .
What is the minimum amount of washers that need to be
ordered to meet all needs?
If today is the start of week one, what week does the buyer have
to place the order to ensure that the end product is made in time?
If an organisation doesn't have an MRP system or is buying goods or services

that are not linked to production, then a requisition may be raised . A requisition
is generated, either electronically or on paper, then given to the buyer to action .
A requisition contains details of the following.
• Goods or services required
• Quantity of goods or services required
• Date goods or services required
A requisition can be raised by anyone in the organisation, but not everyone has
authority to instruct the procurement team to place an order. Organisations often
have a sign-off procedure for requisition s and capped amounts different people
are able to authorise.
For example, it would be expected that a stores manager could put in and
authorise a requisition for consumables for th eir department, such as pens or
health and safety workwear. However, if they decided they needed a whole new
area of racking, it is fair to assume that this would have to be authorised by a
senior member of the organisati on.
Electronic requisitions requiring authority follow a process within a computer

system whereby they are automatically sent up the chain of authority for
signing off. Once full authority has been granted, the procu rement team can
start work on sourcing and supplying the goods or services.
Read receipt Sending and storing purchase orders

A response from
Most purchase orders are sent electronically. This is quick and easy and cost
an e-mail recipient
that indicates the effective. With aid of a read receipt the buyer is assured that their order has been
message was opened received, even if they do not receive an order acknowledgement.
Apply
If a purchase order was sent, a generic read receipt was
received, but no further correspondence or communication
occurred, whose terms would apply?
Purchase orders can also be sent via post, fax or hand delivered, but all
these methods are becoming increasingly rare w ith the technology available
to businesses.
It is important to store or file purchase orders that have been raised. Electronic
systems usually do this automatically, but if manual orders are raised they should
100
- - - - - - - - - - - - - - - - - - - - - - C H A P T E R 3 Sources of information on suppliers and customers
be filed. Purchase orders should be kept for several reasons, including the following.
• To check goods or services received conform to the purchase order specification
• To refer to terms agreed that were set out in the purchase order
• In case a business has an audit
Capturing or gathering and storing data on E:x1,en1d is an important part

of procurement. Money spent on
goods or services
Whether an organisation is public, private or third party sector, it is very
important to capture the data on what has been purchased. Within the public
sector, as it is funded by the public's money via tax, they have a right to know how
it has been spent. Within private sector organisations the board of directors will
wish to know what money has been spent on what, and when, and in third party
sector organisations, stakeholders will want to know what the money donated
has been used for.
Aside from keeping stakeholders informed, capturing data on expenditure is
critical to keeping an organisation functioning effectively.
Businesses set for expenditure as a whole, and these are then broken
down by department. Financial plan for a
set period of time
Consider the marketing department. This department is tasked with promoting on how much can be
the company, engaging stakeholders, and encouraging people to do business with spent
the organisation. In order to do this, they may plan to do the following.
• Attend shows
• Invite people to corporate events
Update the website
The marketing department will have been allocated a budget by their financial
director, usually at the start of the financial year. It is then the responsibility of
the marketing manager to ensure that budget is not exceeded. However, without
capturing data on expenditure, the department won't know if they have spent too
much or have money left.
Computer systems are able to capture expenditure and, ifmanaged correctly, can
generate reports each quarter, or as required, to provide information on what
percentage of budgets have been used.
When procurement are raising purchase orders, if they log the order against
a departmental code, e.g., marketing department, then the amount will
automatically be deducted from the budget.
The importance of capturing data on expenditure

Pedal Power Ltd have just entered their tenth year of
business and are doing very well. The CEO wants to
expand the business and believes, in order to do this,
they need to win sales orders on a very profitable bicycle
that was only made for the first three years of the
business: the PED3.
101
CHAPTER 3 Sources of information on suppliers and customers--- - - - -- - - - - - -- - - ---
The marketing department has been given a budget

for this project and is expected to raise awareness of
the PED3 through a marketing campaign. The CEO has
suggested they speak to the financial directo r to find
out what the budget was for a similar campaign that
had been run to enable them to gauge how much this
may cost. The last campaign was successful, but the CEO
does not know whether it was within budget or not.
The marketing department has been made up of the
same team for eight years and they work very well and
to a high standard. The marketing manager has no
concerns about obtaining the information needed as
she has always approved or rejected all requisitions
and monitored her budget allocations on expenditure
very carefully.
The CEO tasks the procurement manager, who has only
been in post for 18 months, to provide him with revised
costings for the components of the bicycle model PED3.
The procurement manager has concerns, which he
raises with the CEO. His predecessor didn't always use
the MRP system correctly and, although the BOM still
exists for the PED3, he believes the old procurement
Petty cash manager used petty cash to buy some parts from a
Money readily local shop. This means there is very little information on
available for use by
some of the components and no documented trading
employees on small
items history to refer to.
The fact that the previous procurement manager
had not followed procedure will cause the current
procurement manager extra work. Instead of being
able to look on a computer system to see costings,
suppliers and past purchase orders, he will have to start
a procurement project to source the components. A task
that should have been relatively straightforward will
involve researching new suppliers, supplier evaluation
and product specification. The project will t ake up
time from several departments, including research
. and development. Had the previous procurement
manager worked to the same standard as the marketing
manager, the PED3 project would have been a much
faster and more straightforward process.
The use of porta l sites to locate suppliers

or customers
Supplier and customer portals, usually web-based, are where peop le or
organisations can interact with a business, access information about them
or establish an online account to record their t ran sactions and commercial
relationship.
Supplier portals are form ed and set up by orga nisat ions as a way of attracting
suppliers to work with them. Portals are often fo rmed by larger organisat ions that
102
-------------------~CHAPTER 3 Sources of information on suppliers and customers
have the potential to work with lots of suppliers. Portals can be set up for a short
period of time for specific projects or remain live indefinitely.
The portal invites suppliers to apply to work with the business. Details on the
portal give the potential supplier enough information to decide whether they
want to work with the organisation and whether they will meet the criteria set
by the organisation.
Details that may feature on a supplier portal are listed below, and then further
defined in the following paragraphs.
• Overview of the organisation and what it produces
• Organisational structure
• Organisation's definition of direct and indirect supply
• Environmental/CSR policy
Ordering process
• Payment terms
• Supplier handbook
• Confidentiality agreement
• Standards required
• Process improvementtechniques
• Shipping
Overview of the organisation and what it produces

This is a simple explanation to the potential supplier about the business, where it
operates, where in the world it has factories or offices, and what it produces, sells
or provides.
Organisational structure
The portal may show a diagram to demonstrate whether it has a flat or a tall
structure. The portal may also show how the procurement function operates and
which people are responsible for which areas. This gives potential suppliers an
idea of how the business is split up and whether they could supply for multiple
areas of the organisation.
Organisation's definition of direct and indirect supply

There are two types of products or services that procurement can supply: direct
and indirect. A portal will outline their definitions of their direct and indirect
supplies. Direct and indirect supplies are not the same for all organisations. For
example, a business may consider light bulbs to be an indirect product, but ifthe
business manufactures lamps and supplies them with a light bulb, the light bulb
becomes a direct product.
Environmental/CSR policy
You learned about this in section 3.1.
CSR policy stands for corporate social responsibility policy.
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CHAPTER 3 Sources of information on suppliers and customers-- - -- - - - - - -- - - - -- - - -
Ordering process
The portal will explain how ordering works and whether it is based on EDI
or manual processes. Further details will be given on how to ensu re prompt
Electronic data
payment is made after supply. Organisations may refer to the three-way process.
interchange (EDI)
The exchange of data This is when they only pay invoices from the suppliers if the purchase order
between companies is matched exactly w ith th e delive ry note and invoice. This syste m helps to
in computerised promote extra care from t he supplier to make sure they supply exactly what has
format
been asked for.
Payment terms
You learned about this in section 2.1.
Supplier handbook
A copy of the supplier handbook may feature on the portal so that suppliers can
see how they are expected to work w ith their customer, what is required of them
and how any disputes will be handled.
Confidentiality agreement
A copy of the agreement that the supplier would be required to sign will be
ava ilable to view. As per the supplier handbook, this ensures the potential supplier
is aware of what is expected prior to applying to work wit h the organisation.
ISO 9000
A set of international
quality management Standards required
and quality assurance
standards that help Most manufacturing organisations work to ISO 9000 standards and therefore w ill
companies effectively require the potentia l supplier to confo rm to the same.
document and
maintain an efficient
quality system. They
are not specific to Process improvement techniques
any one industry and
can be applied to Many organisations implement techniques to improve their processes and make
organisations of any them more efficient. An example is the Six Sigma technique. This technique was
size developed by the engineer Bill Smith whilst working for Motorola in 1986. The Six
Sigma technique is based on providing organisat ions with t he tools, methods and
strategies to improve processes. An organisation's suppliers would most likely
be required to involve th emselves with a company's techniques, contributing
innovative ideas and suggestions.
Apply
Wh at other improvement techniques might an organisation use
to improve t he efficiency of their processes?
Shipping
Many of the organisations that invite suppliers to register or apply on their portal
are international. Therefore, it is not unusual for an organisatio n to include their
preferred shipping methods. Shipping methods are also known as INCO t erms,
104
and there are a variety of options to consider. lt\JCO terms will be covered in more
detail later in the CIPS course. Here are a few examples. z
• EXW - Ex works (named place)
l!\ICO tiorms
• FCA - Free carrier (named place) International
CPT - Carriage paid to (named place of destination) commercial terms of
sale that assign costs
• CIP - Carriage and insurance paid to (named place of destination) and responsibilities
between the buyer
DAT - Delivered at terminal (named terminal at port or place of destination) and seller when
delivering products
If, after reading all the information on the portal, a supplier thinks they meet the
criteria and their cultures fit, they can apply to work with the organisation. The
portal will have an application form, which can be downloaded or completed
online, and it is then submitted to the organisation for consideration.
Having a portal like this ensures the opportunity to work as a supplier is available
to all parties. The benefit for the organisation is that they are likely to get a diverse
range of suppliers to work with.
Customer portals
Whereas a supplier portal is often used to locate and attract suppliers to an
organisation, a customer portal is more about providing a good service to an
organisation's customers.
A customer portal is an electronic gateway whereby customers of an organisation,
or 'buyers', can access a multitude of information including their orders, order
history and agreements with the organisation. This is a useful tool as it saves the
time and resources needed to answer telephone enquiries, send out invoices, or
send product information to potential customers.
Each customer using the portal has their own area of the website with a private
login and password to ensure that their details are secure and no other customers
can access them.
Amazon has a customer portal where each user has access to their own details,
current orders and buying history. This is an example of a B2C customer portal.
It is fair to say that having a portal may attract customers to work with an
organisation, as it will simplify the process of buying goods or services from them.
Common information contained on a B2B customer portal includes the following.

• Customer's details
• Customer's price lists
Customer's quotations
• Customer's order history
• Customer's invoices
Customer's available credit
• Customer's contracts
105
CHAPTER 3 Sources of information on suppliers and custo mers~-------------------
Customer's details
A business customer can enter their details on a portal. These details wou ld
include the business name, registered address, shipping addresses, contact
Shipping address
The address to which
numbers and e-mail address.
deliveries are to be
sent Customer's price lists
Customer portals w ill include price lists of items or services that the customer
regularly buys or items or services that are commonly used. It is likely that all the
customers' price lists will vary depending on a number of factors. The following
factors will affect the prices offered.
• Order quantities
• Ordering style, e.g., blanket order, spot buying
• Trading history
• Relationship status
Having access to a price list saves time for both the supplier and t he buyer. The
buyer can simply log on to the portal and see what the current price is. This means
that no e-mail or phone call is needed and feedback is instant.
Customer's quotations
Customers can subm it RFQs through portals, and the quotations received back
can be stored. This saves time for both parties and means the customer has
constant access to the information needed to choose a supplier.
Customer order history

A full history of the orders placed will be available for download. This is particularly
helpful for procurement professionals as they can simply log on to the portal and
place repeat orders.
Check
Think back to the case study earlier in this section. If the
previous procurement manager at Pedal Power Ltd had used
a customer portal to store orders made with suppliers, how
would that have affected the job of the new procurement
manager?
Customer's invoices
Many organisations rely on portals for distributing invoices to their customers.
A customer portal would generate an e-mail to the procurement or finance
department each month advising them that their invoices are available to
download. The relevant professional wou ld then log on and download the
invoices for payment. 828 organisations that work very closely together may
have a system including EDI whereby the invoices from the customer portal are
automatically uploaded into the customer's computer system .
The benefit of invoices being available on a portal is that they are always there,
so, unlike paper copies that may get misplaced, you can be confident that the
106
information cannot be lost. Organisations can review what has been bought and
how much it cost, which can help with meeting budget requirements as learned
earlier in this section.
Customer's available credit

A customer can log on to the portal and see whether they are close to their
credit limit and whether they have enough credit available to place their order.
This is useful because, ifthere is not enough credit, the order can be placed with
another supplier. Without this information, an order could be raised and sent to
the supplier and then rejected. This would take up valuable time and could stop
production in a manufacturing organisation if materials were not received in time.
Customer's contracts
Portals can hold a customer's contracts, i.e. an electronic copy of the contract
between the supplier and the buyer (customer). This is useful as it enables the
customer to easily check on what has been agreed, the terms and the specifications.
Customer portals have many advantages as outlined above. The main benefit
of using a portal, as a buyer, is that they have constant access to up-to-date
information.
s Ii s
As you have learned above, a supplier portal can attract and locate suppliers.
Once those suppliers have been approved, they are likely to be added to a
supplier database.
Supplier databases contain a lot of information and this can be used in a variety
of ways. It is important for the information to be structured in a uniform way on a
computer system.
Public sector organisations use supplier database systems a lot as they have many
suppliers to ensure all the needs of the public are met and services do not stop.
Table 3.3 shows the information contained in a supplier database.
Supplier's details
Name, type of organisation, address, main contact details
Products or services offered

What does the supplier produce?
Supplier rating
What tier of supplier are they?
What is their rating?
This will be covered later on in this section.
107
CHAPTER 3 Sources of information on suppliers and cust o m e r s - - - - - - - - - - -- - - - -- - - - -
Lead times
What are the lead t imes the supplier works to?
Standards worked to
Is the supplier ISO 9000 accredited?
Do th ey follow Six Sigma for process improvement?
Payment terms
What amount of time does the supplier require payment of their invoices in?
Credit rating score

What score does the supplier have?
Trading history
What business has been done with the supplier previously?
KP ls
Does this supplier meet their KPls?
Pricing
What pricing structure does the supplier work to?
Price lists may be held on items.
Rebate
Rebate Does the supplier offer a rebate?
An amount paid
back on top of any CSR Policy
discounts that have
previously been
Does t he supplier have a CSR policy? If so, a copy of it would feature.
agreed
Table 3.3 Supplier database information
Each supplier database is different and holds as much or as little information as is
needed within the organisation.
Suppl ier database systems can be as simple as a list of all suppliers an
organisation works w ith and their contact details, wh ich is useful for sending
out generic correspondence.
On the other hand, some supplier database systems can be very complex. These
Pre-qualify can pre-qualify suppliers for receiving an invitation to tender or an RFQ.
Match a certai n set
of criteria to qualify The pre-qualification can be based on a number of thi ngs, incl uding the following.
immediately for
• Ca n the supplier supply what is needed?
invitation to tender
or request for • Do they match t he required supplier rating?
information (RFQ)
• Do they hold the required credit rating score?
• Do they have an up-to-date CSR policy?
Many orga nisations rate their suppliers. This is an important part of supplier
management that will feature later in the CIPS course. Buyers rate their suppliers
using KPls, which gen erate a score. The score will be entered in the supplier
database and for some tenders or RFQs. When a certain type of supplier is
needed, this rating will play an important part.
The supplier database will have tick boxes, which wil l be populated whenever a
supplier is ad ded. Generating this information enables the database to provide
108
a list of suppliers that meet the required criteria. The supplier selection process
shown in figure 3.11 will generate the information needed to populate the
supplier database. This may include pre-qualification questionnaires, responses to
the invitation to tender and presentations.
Review No
Evaluate >___.._
Suppliers
~ t
~~ce.ive
TE!naet Presentation
Site Visit
Receive
Evaluate
Responses Issue
ITT
Issue PQQs
B~c~iye
con)pleied
PQQs
Yes
Negotiate
Evaluate
Contract
Figure 3.11 Supplier selection (Source: www.jisc.ac.uk)
A document
Apply sent to potential
suppliers asking
It is mid-winter and very cold. A buyer has been tasked with for information
selecting three suppliers to send RFQs to for the supply of necessary to support
security guards to Pedal Power Ltd. Pedal Power Ltd is located their qualification as
in a small town with poor transport networks. The security an approved supplier
guards are required to work twelve-hour shifts and will be
paid every seven days. The security guards have to be reliable
and there always has to be a back-up plan should one of them
be unable to work. The security guards have to be provided
with suitable clothing by the suppliers but Pedal Power Ltd
will give them torches and mobile phones. As Pedal Power Ltd
is concerned about intruders, they want to be sure that the
security guards come from a reputable supplier that knows
the local area.
What pre-qualification criteria would you set out to ensure
that the suppliers you selected were suitable to provide a
quotation?
To conclude, the procurement process uses various systems so that people can
make informed decisions on which suppliers to work with. These systems ensure
the procurement professional has traceability and can raise orders in a timely and
efficient way to keep production flowing and the stakeholders satisfied.
109
CHAPTER 3 Sources of information on suppliers and c u s t o m e r s - - - - - - - - - - - - - - - - -- - -
Chapter Summary
In procurement, research is very important. Suppliers and customers
should be thoroughly eva luated prior to any contractual agreement be ing
m ade. This helps to reduce the risk an organisation exposes itself to. As
you have learned, there are many ways to conduct research from visiti ng
suppliers' and customers' websites t o conducting official credit rating checks
through accredited agencies. Procurement includes many processes for
tasks such as ordering and ca pturing data. You will now understand the
variety of processes, their purpose and how each system can work to aid th e
procurement function.

0 Wh at does B2B stand for?
a. Business-to-business
b. Back to basics
c. Business-to-bank
d. Back to business
e What do credit rating scores help buyers do?

a. Upset suppliers
b. Eval uate suppliers
c. Sell supplier's data
d. Pay supplier's debts
8 CSR policies eva luate:

a. Corporate social responsibility
b. Corporate secret responsibility
c. Corporate stationery res ponsibility
d. Corporat e secondary responsibility
110
CHAPTER4
After completing this chapter you will understand

Learning ., ..~~" the advantages and disadvantages of a range of
outcome pricing methods used in procurement
Chapter overview
Explain the advantages and disadvantages of a range of pricing
methods
• Fixed pricing, lump-sum pricing and schedule of rates
• Cost-reimbursable and cost-plus pricing arrangements
• Variable pricing
• Target pricing
• Risk-and-reward pricing
Introduction
As you learned in chapter 2 there are a variety of pricing strategies that can be
used within procurement
In this chapter you will learn about the advantages and disadvantages of the
pricing methods through case study examples.
111
CHAPTER4 Pricing methods used for the purchasing of goods or services ~----------------
CD Explain the advantages and

disadvantages of a range of
pricing methods
Chee le
Can you remember the definition of the following?
• Fixed pricing
• Lump-sum pricing
• Schedule of rates
• Cost-reimbursable or cost-plus arrangements
• Variable pricing
• Target pricing
• Risk-and-reward pricing
For revision purposes you may want to revisit chapter 2 before
continuing with this chapter.
A brief review of pricing strategies

Fixed pricing is where the price the supplier quotes or the response to the request
for quotation or tender does not change.
Lump-sum pricing is when the suppl ier and the buyer agree a final price for an
order at the beginning of a project.
A schedule of rates is a table of prices that clearly shows how much a supplier will
charge for goods and services.
A cost-reimbu rsable or cost-plus arrangement is where the supplier will charge the
buyer for their costs plus an agreed fee at a flat rate or as a percentage mark up.
Variable-pricing arrangements enable the prices to change throughout the
duration of the agreement.
In a target-pricing arrangement a target price is set and agreed between the two
parties, the buyer and the supplier, and the aim is to supply and buy the goods
and services for that agreed price or lower.
A risk-and-reward-pricing arra ngement is one where the supplier takes a gamble.
If the supplier meets all the obligations of the cont ract, which will have been
agreed with the buyer, the su pplier will get a reward, i.e. a bonus. If, on the other
hand, the supplier does not meet the terms that have been agreed, they will be
exposed to risk.
Fixed pricing
Fixed pricing at Peda l Power Bicycles

Pedal Power Bicycles manufactures high quality pedal
cycles.
Jimmy, a recently appointed buyer, attends a review
meeting where the CEO explains that the business
112
- - - - - - - - - - - - - - - - - C H A P T E R 4 Pricing methods used for the purchasing of goods or services
needs to become more cost efficient and reduce the

amount of time the shop-floor staff are waiting for
parts.
In years gone by, the organisation has spot bought
many components and reacted to customer orders
as they are placed rather than being proactive. The
customers always love the product but in their feedback
they state that the lead time is rather long.
The organisation manufacturers several styles of
bicycles, but they all have the same handmade high-
quality seat.
Jimmy suggests that Pedal Power Bicycles could
explore fixed pricing. This is a new concept for the
organisation. Rather than placing an order for one or
two seats every week, negotiating the price and then
chasing for delivery, Jimmy explains that they could fix
the price with the supplier and commit to buying 100
over an 18-month period. The organisation is doing
well and orders are coming in regularly, plus they plan
to attend a show in the coming months, which always
boosts sales.
Jimmy goes on to explain that the organisation can
place a blanket order for 100 seats at an agreed price
and simply contact the supplier to call off the seats as
they are needed.
Jimmy speaks to his colleagues and the seat supplier
about his idea.
The finance department are happy with the concept
because they can accurately forecast how much they
will have to pay the seat manufacturer over the next
18 months.
The people who assemble the bicycles are also excited
by the idea. Quite often they have had to wait for a
delivery of seats because the supplier has not had
time to make them. If the fixed pricing agreement
happens, the supplier will most probably make larger
quantities of seats at a time and have them ready for
when call offs are placed. This will stop the delays on
the shop floor.
The supplier of the seats is pleased as they can plan
their workload accordingly and not have to rush to
meet last-minute orders. The supplier states that they
would always guarantee to be able to supply 10 seats
within two working days.
Jimmy presents this to the procurement director who
thinks it is an excellent idea and sets up a meeting with
the seat manufacturer to negotiate a deal.
113
CHAPTER 4 Pricing methods used for the purchasing of goods or services - -- - - - - - - - - - - - ----
Using the case study above as an example, look at the advantages and
disadvantages of fixed price contracts.
One advantage is that Pedal Power Bicycles will know exact ly how much they are
going to have to pay the supplier for the supply of t he seats. Figure 4.1 shows how
the prices do not vary in this sort of agreement.
VI
QI
u
'i:
a.
~
~
~
:E i-----------
I- Price I
Global product availability
Figure 4. 1 Fixed pricing graph
The seat supplier has two options when quoting Jimmy for this f ixed price contract.
They can manufacture the entire amount that Pedal Power needs for the 18 months
and hold them in inventory, or manufacture them in stages and supply as jimmy
needs them.
An advantage for the supplier is that they have the guarantee of business for the
next 18 months.
Fixed pricing does have disadvantages. The price t hat is agreed for t he supply
of the seats is likely to be more expensive than if they were spot bought. This is
because the manufacturer needs to inflate the price to take account of the fact
that their costs may ri se over time. However, should the prices rise beyond what
the supplier has accounted for, Pedal Power could find themselves getting a price
that is better than could be sought through a spot purchase.
There is an element of t he unknown in f ixed pricing, and both parties are exposed
to risk.
Should Pedal Power not receive enough orders to cover the amount of seats t hey
have on order, they are still contracted to take them. This could cause financial
problems if they have to pay for something that they do not need.
The supplier could face a similar problem. If Pedal Power were unable to carry on
trading and the business folded, this would leave the seat manufacturer exposed
and unable to sell all the stock that they were holding.
Lump-sum pricing
Lump-sum pricing at Horris Houses Ltd

Maureen had been left a large sum of money and some
land when one of her relatives sadly passed away.
She had always wanted to have a big house in the
countryside where she could have animals grazing in the
garden. Therefore, with the money, Maureen decided to
have her dream house built.
114
' - - - - - - - - - - - - - - - - - C H A P T E R 4 Pricing methods used for the purchasing of goods or services
She rang Horris Houses Ltd, a local and reputable

construction company, and made an appointment for
the owner, Horris, to come and visit her.
They discussed what Maureen wanted and in time had
plans drawn up and got permission to erect the house.
Maureen asked the builders how much the house
would cost to build. Horris Houses suggested that they
draw up a contract using a lump-sum pricing method.
Maureen wasn't sure what this meant, so Horris
described how it would work.
Horris explained that with lump-sum pricing she would
know exactly how much the build was going to cost.
She could budget for it and be sure that the price given
would not increase. Horris went on to state that if she
was in agreement he could order all the materials and
this would make sure that the profit he calculated for
himself would be gained rather than buying at various
times when the prices could potentially go up.
Maureen asked, "What if you have made a mistake and
your costs are more than you have estimated?" Horris
explained that this was up to him to get right. If he
had made an error and his profit was reduced that was
his risk.
Maureen agreed that this seemed the fairest way and
the best option for her.
Horris stated that he would like to set up staged
payments throughout the build so that his cash flow
would be good and he could pay for the materials as
required. Maureen agreed.
A lump-sum pricing contract was created and the
house was scheduled to be built.
From the case study above you can see that one of the advantages of lump-sum
pricing is that the supplier knows exactly how much they are going to get paid and
ideally how much profit they are going to make.
Another advantage is that the buyer has the benefit of knowing exactly how much
they have to pay out on the contract and can plan their budgets accordingly.
The disadvantages are that prices could reduce and, having agreed a lump-
sum price, the buyer could pay more than if they had used a cost-plus method.
Likewise, if a supplier has underestimated anything that is needed and has to
make purchases and incur additional and unexpected expense, their profit could
be significantly reduced.
Figure 4.2 shows how buyers and suppliers see lump-sum pricing strategies.
The diagram shows that the process is much simpler for the buyer than for
the supplier.
115
CHAPTER 4 Pricing methods used for the purchasing of goods or services - - - -- - - - - - --------
Lump-sum price
Cost of
Tota l cost of the project
Cost of Cost of Cost of

B rofit
Cost of
!
""Q.
ro·
~
~·
raw house panel delivery electricity :E
materials extension painting
Figure 4.2 Lump-sum pricing: a buyer's and a supplier's view
Indirect costs associated with lump-sum pricing
Check
What is the difference between direct and indi rect costs?
Lump-sum pricing shou ld account for the indirect costs that the supplier is going
to incur. These costs shou ld be covered in the price quoted to make sure that the
supplier is not disadvantaged.
Costs such as travelling to the building site, the electricity requ ired to keep the
office running and the salaries of any administrative staff should be considered.
Apply
Describe three additional indirect costs and three direct costs
that Horris w ill have to cons ider when preparing his quote for
Maureen.
When negotiating a lump-sum pricing contract, the extra costs that may be
included need to be considered very carefully and calculations done to make sure
they are represented accurately.
To summarise, when calculated carefully, lump-sum pricing has significant
advantages but, if a suppli er is rash and enters into a contract with out taking all
the necessary costs into account, it could cause their business a lot of problems.
The supplier bears the majority of the risk in lump-sum pricing as they do not
know what changes may occur in their business or the market but they still have
to provide the contract at the agreed price.
The buyer is only exposed to minimal risk as they have set expenses. The only risk
they face is if their supplier has financial problems and cannot complete the job
after they have paid.
Schedule of rates
Schedules of rates are used when buyers do not know exact quantities of the
product or service they require over a period of time.
116
Using a schedule of rates at Litter Pickers Ltd

Litter Pickers Ltd offers its customers a service. They
clean up car parks, gardens or yards.
They have many different types of customers and no
two jobs are the same.
Their latest enquiry is from Barack who has recently
purchased a new site where he wants to offer storage
for people to keep their caravans and holiday homes.
Previously the site belonged to a farm but was vacated
several years ago and in recent times people have
thrown their rubbish on it. Currently it is almost
impossible to enter the site in a vehicle due to the
amount of rubbish.
Barack asks Litter Pickers Ltd for a quotation to clean the
site. The sales person suggests that Barack reviews their
schedule of rates as this is the fairest way to price the job.
Because it is impossible to establish exactly how much
rubbish is on the site and how long it will take to clear
it because of difficult access, a firm and fair quotation
cannot be submitted. The sales person states that if a
lump-sum price was submitted it would be extremely
high to make sure that every possible cost was covered.
The sales person explains that the schedule of rates
is based on how many people are required on site. If
Barack wants the job done quickly, Litter Pickers Ltd will
attempt to supply ten litter pickers and this will cost him
$75 per person, per day.
If he wants the job doing over a longer period of time
and the cost spread out to aid cash flow, Litter Pickers
Ltd will attempt to send two litter pickers at $90 per
person, per day.
Barack would just need to call the organisation when
he was ready for the work to start and Litter Pickers Ltd
would do their best to get the work done.
Litter Pickers Ltd would send invoices once a week,
which should be paid in 30 days. If Barack were to
decide that he wanted the project to stop he could
give seven days' notice and no more rubbish would be
cleared after that time.
Barack is confused.
The salesperson explains.
"If I send ten people all in one vehicle the cost is lower.
This is because the cost to transport them all to one
site is less than sending them in different directions. To
insure ten people to work on one site is cheaper than
insuring two people to work on five different sites, so I
can pass the saving on to you."
Barack understands and asks for the rubbish to be
cleared by ten people working on site each day.
117
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Here are the advantages to Barack of using a schedule of rates.

• The price that Utter Pickers Ltd quotes is li kely to be cheaper than if Ba rack
opted for a fixed price or lump-sum contract.
• Barack can control how quickly the rubbish is cleared and ha lt the project at
any time without losing money. If he had agreed a lump-sum pricing method
and then decided that enough area had been cleared to start storing caravans
he would still have had to pay the full amount.
The disadvantages that are linked to a sched ule of rates include the following.
• Barack will not have a final price to use for his budgeting.
• There is a chance that Litter Pickers Ltd could win a contract, similar to Ba rack's,
and prioritise that work. The supply is not guaranteed with a schedule of rates.
• Schedule of rates work is often not deemed to be the most strategic
relationship with a supplier and junior staff members, agency workers or
people w ith less experience are often given this sort of work. This could result
in a lower sta ndard of service than if other pricing methods were chosen.
Cost-reimbursable or cost-plus pricing

arrangements
Cost-reimbursable pricing at Tina's Training

Tina's Training is a business that offers health and safety
training to individuals within organisations loca l to Tina's
home. Tina does not charge for travel or expenses, j ust
a flat rate of $300 per day to provide the training.
Tina's most recent client is a business that has its head
office in the same town in which Tina lives, but it also
has six sites across the country.
Unfortunately, t he individuals cannot all attend one
training session in the local town, so Tina has been
asked to put a proposal and costings forward to visit
each site.
Tina does not know how long it will take her to travel
to the sites or how much it will cost. After thinking long
and hard she decides that the fairest pricing method is a
cost-reimbursable method.
Her offer is to charge the client the amount of money it
costs her to get to each site and an hourly rate for the
time incurred. This covers her costs and then the $300
on top contributes towards her profit.
The organisation thinks that this is very fair and agrees
to give Tina the contra ct.
The advantages here of a cost-reimbursable strategy are as follows.

• Tina will definitely make a profit as she has covered her expenses and then
added her usual day rate on top.
• lffuel prices or hotel rates fluctuated and Tina had offered a f ixed or lump-sum
price, t he profit margin wou ld have been less.
118
The disadvantages of using cost-reimbursable pricing are as follows.

• Tina could have made more profit if she had opted for lump-sum pricing and
over-estimated the expenses.
• Tina's client does not know what the final expense will be so cannot accurately
forecast their budget.
• Tina could be dishonest about her costs in order to make a higher
percentage profit.
The cost-reimbursable strategy relies on the buyer and supplier having a
collaborative relationship whereby they trust each other.
In general this arrangement involves a lot of discussion prior to signing a contract
and it can become complicated. The supplier and buyer must decide which costs
are included in the arrangement. Are all costs going to be included or just direct
costs? Will indirect costs be refunded? Will the buyer pay a percentage of the
supplier's fixed costs? Will variable costs be capped?
Variable pricing at Grocery Goods

Grocery Goods is a small shop that sells food products
and is owned by Raj.
Grocery Goods has been losing trade in recent times
due to prices being unpredictable.
The local people used to always use his shop but more
often than not these days they opt to travel to the local
town and use a supermarket. The feedback from the
local people is that the prices in the supermarket are
more stable. Grocery Goods' prices are never the same
from one week to another.
Raj has realised there is a problem but is not sure what
to do. He orders his products from his suppliers on a
weekly basis and pays the supplier. There are no long-
term contracts in place. The owner simply rings around
the wholesalers to see who has the best prices and
places an order. When the products are delivered, Raj
puts them on the shelves and prices them at 15% on
top of his buying prices. Raj is aware that sometimes a
certain tinned food is $1 and sometimes $2.
Raj decides to talk to his friend Colin who is in
procurement. Colin explains to him that at the moment
he is offering variable pricing to his customers. This
can be good because when the price is low they benefit
but at the same time when the prices increase the
customers have to pay more. The customers are not
able to budget and sometimes can get everything they
need but sometimes run out of money when they still
have items on their list.
Raj understands but does not know what he can do.
Colin suggests that Raj looks at his supplier database
and arranges meetings with several of them. In the
119
CHAPTER 4 Pricing methods used for the purchasing of goods or services - - - - - -- - - -- - - - - - - -
meetings he needs to talk about agreeing to take a

certain amount of products in a certain time and fixing
the buying price. That way the prices in his shop will
rema in stable for longer. The suppl iers would have more
trust in Raj if this agreement were in place as he would
become a regular customer and not just a buyer that
places orders w hen the prices are at the cheapest.
Raj could explain to his customers that prices will remain
the same for a fixed period and this would hopefully
encourage them to use the shop again.
These are advantages of variable-cost pricing.

• Raj will know he will make a profit on each delivery.
• The customers can take advantage of the prices when they are low.
The main disadvantages are as follows.
• Customers have to pay high prices when they rise.
• Long-term variable pricing is often less competitive to a buyer than fixed.
• Budgeting is impossible with variable pricing.
Target pricing
Target pricing at PC Parts

PC Parts is designing a new component, wh ich is long
overdue in the marketplace. PC Parts has always been
the market leader with new components. They are
concerned because an employee who recently left
has got a new position at PC Part's m ain competitor.
The concern is that the ex-emp loyee knew about the
concept for the new component and may try to copy
the idea.
In order to keep their status as market leader, PC Parts
must ensure that their component is priced correctly in
order to sell.
PC Parts have done lots of research and know the price
t hat the component needs to retail at. They have also
set a target price to buy it from their suppliers in order
to make the profit margin required.
The buyer from PC Parts and the supplier have been
working very closely together to try to meet the target
price.
After months of hard work, the supplier confirms that
they can supply the component for $2 less than the
target price. Therefore, because of the collaborative
relationship between the buyer from PC Parts and the
supplier, an agreement has been made to split the saving
between the two companies. Therefore, the supplier will
charge PC Parts $1 less than the target price.
120
Advantages of target-pricing strategies are that it brings suppliers and buyers

closer together in their working relationship. Suppliers are likely to be monitoring '4.1
how the project or contract is progressing to anticipate if the project is on target or
ahead of schedule. The relationship has to be open, strong and have a high level
of trust for this strategy to work.
The disadvantages are that the constant involvement from the buyer to monitor costs
may become a nuisance for the supplier and relationships may become strained.
If the relationship is not strong, the supplier may be dishonest and not tell the truth
about any savings they negotiated in order to keep any profits for themselves.
Contracts are complex to write for this type of agreement as there is a lot to
include in order to ensure that both parties are treated fairly.
ci
Risk-and-reward pricing at Free Rangers Ltd

Free Rangers Ltd is a business that produces eggs and
supplies them to supermarkets.
The contract between Free Rangers and the supermarket
has come up for renewal and Free Rangers is concerned.
Historically the supermarket paid Free Rangers an
amount per egg depending on its size: the larger the egg
the higher the amount paid. This had worked well for a
number of years.
The supermarket stated that their consumers now only
want medium sized eggs and anything that was too
large or too small would not be suitable.
Free Rangers' production manager, Suki, read the
proposed contract. She believed that it was a risk-and-
reward-pricing contract.
The terms in the contract outlined that the eggs had to
be within the size tolerance as per the specification that
was attached. The tolerances were very small and this
was a concern, especially because the supermarket was
now proposing to refuse to pay for any eggs that did not
meet the specification.
If Free Rangers supplied the supermarket with the
required number of the tolerated size of eggs against each
order they would receive payment in full with a 5% bonus.
If 10% of the eggs supplied were out of the tolerated
sizes, the invoice would be reduced by 50%.
If more than 10% of the eggs supplied were out of the
tolerated sizes the invoice would not be paid.
Suki read and re-read the proposed contract. She
consulted the buyer within her organisation who
confirmed that it was a risk-and-reward-pricing method.
Suki could not agree to these terms. It would not be
possible to guarantee the sizes to such small tolerances
121
CHAPTER 4 Pricing methods used for the purchasing of goods or services - - - - - -- - - - - - - -- --
and the amount of work that would have to be done to

check all the eggs would mean that the money being
offered would simply not cover the costs. The risk was
too great.
Suki decided to arrange a meeting with the supermarket
to discuss things further.
Generally speaking, in this type of strategy, the higher the risk, the higher the
potential reward, as demonstrated in figure 4.3.
Risk
Figure 4.3 Risk-and-reward graph
Referring to the case study, an advantage of this pricing strategy is that if Free Rangers
could meet the tolerances of the egg sizes they would have made a larger profit.
The disadvantage of this pricing strategy is that the amount of risk t hat the
supermarket was exposing Free Rangers to was unfair.
In general, with this form of strategy, it is important to agree a high price incentive
that really encourages the supplier to meet the contractual requirements but not
so high that it prices the buyer out of the market. The element of risk should not
be so great that the supplier could not succeed as a business.
These contracts can take a lot of time and negotiation to get them exactly right so
all parties can benefit. Ideally it should be a beneficial and motivat ional agreement
for both parties, not an opportunity for one side to make a large profit to t he
detriment of the other.
Apply
Explain, as if you were Suki, what form of pricing strategy you
would have proposed to the supermarket and your reasons why.
Advantages and disadvantages of the

various pricing methods
Tabl es 4.1to4.7 outlin e the advantages and disadvantages of the pricing methods
learned about throughout this book.
122
' - - - - - - - - - - - - - - - - - C H A P T E R 4 Pricing methods used for the purchasing of goods or services
Fixed pricing /
4.1
The price remains the same The market price could decrease and
throughout the contract. variable or spot pricing could be cheaper.
It is easy to budget for. The price may be higher than spot
buying.
The stock is readily available to be The suppliers have to commit to or
called off. hold lots of stock.
The amount of administration required
is lower.
Table 4. 1 Fixed pricing: advantages and disadvantages
lump-sum pricing
The buyer knows exactly what they will The supplier could charge more for the
be paying for during the whole project. project or contract using a different
strategy.
The supplier knows exactly how much The buyer could purchase the goods or
money they will receive so can budget services more cheaply using another
accordingly. strategy.
If the market prices rise, the buyer is The supplier may not make the
not affected as the lump-sum price budgeted profit if the market prices
remains the same. rise.
The buyer is not exposed to any risk The supplier takes on the risk. If the
with regards to price rises. market rises they cannot get paid any
more and could make a loss.
The payment is usually staged, so the The payment is usually staged. If the
buyer does not have to pay a large supplier is unable to complete the job
amount of money at the end of the due to cash flow problems and the
project, which is beneficial for their business goes into liquidation, the
cash flow. buyer loses the money that they have
already paid to the supplier.
Table 4.2 Lump-sum pricing: advantages and disadvantages
Schedule of rates
The buyer knows exactly how much The prices could be higher than using
they will have to pay for the goods or other forms of pricing strategy.
services.
The buyer can send orders as and The supplier often does not prioritise
when they are needed with little schedule of rates work.
forward planning.
Table 4.3 Schedule of rates pricing: advantages and disadvantages
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CHAPTER4 Pricing methods used for the purchasing of goods or services - - - - - - -- - - - -- - - - -
Cost-reimbursable or cost-plus pricing

Advantages Disadvantages
The supp lier is guaranteed to get their The buyer w ill not be ab le to budget
costs repaid. effectively as there is no fixed pricing.
It is a simple way of agreeing prices The buyer will not know the exact cost
with transparency on both sides. of the project until completion.
If a fixed fee is agreed on top of the The supplier will not know the
costs the supplier knows exactly how value of their profit until they
much profit they will make from the have completed their project if a
outset. percentage fee is agreed.
If a fixed fee is agreed, the supplier
could have made more money if a
perce ntage fee had been negotiated.
Everything is well documented in the The contract is often complex to write.

contract.
All supplier costs can be covered. Some contracts do not include indirect
costs.
Table 4.4 Cost-reimbursable pricing: advantages and disadvantages
Variable pricing
The buyer gets the advantage of low The buyer gets the disadvantage of
prices when the market drops. high prices when the market rises.
The supplier can negotiate a The buyer cannot easily budget for
percentage fee on top of the market how much a contract wi ll cost.
price so can budget w hat their profit
will be after their costs.
The supplier is not exposed to risk. The buyer is exposed to risk.
Table 4.5 Variable pricing: advantages and disadvantages
Target pricing
The supplier knows how much profit The suppli er could have made more
they are going to make. profit using a different strategy.
The buyer knows how much the project The buyer could have negotiated a
is going to cost them. better deal using a different strategy.
The buyer may get a share of the The supplier could keep their surplus
extra profit the supplier makes if they profit if a different strategy had been
complete the deal under the agreed agreed.
target price.
124
The buyer is not exposed to risk. The supplier is exposed to risk. If they
do not supply at the agreed target
price they can risk losing money.
This strategy works on a high level of Buyers can be taken advantage of if the
trust so relationships will be strong. relationships are not collaborative.
Table 4.6 Target pricing: advantages and disadvantages
Risk-and-reward pricing
The buyer is not exposed to any risk. The supplier is exposed to all the risk.
The supplier can make extra money if The buyer could pay more than in
they meet and exceed their objectives. other forms of contract if the supplier
meets their targets.
The buyer does not have to pay if The supplier may not get paid if they
the supplier does not achieve the do not meet the objectives, but they
objectives but the buyer could still could have still put in a lot of work.
benefit from the contract.
Enables suppliers to clearly monitor Sets difficult objectives that have to be
contractua I outcomes. met by the supplier.
lncentivises the supplier to achieve.
Table 4. 7 Risk-and-reward pricing: advantages and disadvantages
Here are some of the factors you should consider when making a decision on
what type of pricing method is most suitable.
• How much profit does an organisation want to make?
• What is the supplier relationship like?
• How much will the costs be?
• Are any investments needed?
• Is there enough resource?
• Are the market prices stable?
• Could the job be done more quickly than suggested?
• How much risk should be taken?
Apply
Reflect on all the case studies in this chapter. Apart from the
list above, list what other factors you should consider when
making a decision on which type of pricing method is most
suitable.
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CHAPTER4 Pricing methods used for the purchasing of goods or services - - - - - -- - - - - - - - - --
Chapter Summary
All the pricing methods and strategies you have learned about in this book
have a place in procurement. To make an informed decision you must
explore all the advantages and disadvantages in detail. A contract does not
have to include only one pricing method. It can be made up of different
strategies for different areas of the agreement.
The ultimate goal for building long-term, strategic and collaborative supplier
relationships is to agree on a form of pricing that will result in a 'win-win'
situation.

0 Direct costs are:
a. Not directly attributable to the product or service
b. Directly attributable to the product or service
c. Not required to be managed
d. Not as important as indirect costs
0 Which two components make up an agreement?
a. Offer and order
b. Offer and refund
c. Offer and acceptance
d. Offer and consideration
0 Acceptance, rejection, revocation, time and counter offer are ways that
an offer can be:
a. Agreed
b. Tendered
c. Received
d. Terminated
126
terms for level 2/3
overhead cost is spread among all products or
Shortened forms of a set of words, consisting of services and this is the allocated overhead
initial letters pronounced separately, for example,
,,,n individual with Cil!lac:ity
invitation to tender (ITT)
A person who is legally able to enter into a contract
Pt!3C cla~;si·fication because of their appropriate age and state of mind
A system of prioritising different types of inventory
list
based on their value or importance to the business
A list of suppliers whose basic credentials have
been checked. This would normally cover financial
Indicators or measures used to assess whether a stability, compliance with any laws or licences
product or service meets the standard required needed to operate, adequate insurance, health and
safety policies and the like. There is no contract with
the suppliers, but there is some assurance as to
A measure, using the number of defects detected,
their appropriateness for specified categories. This
that determines whether a batch of manufactured
list may restrict what types of order (by category,
products meets the standard required
value or geographical location) can be placed with
A.ccreditatien each of them
A process of external verification to provide evidence
that a standard of quality has been achieved, for
A relationship between two parties who trade with
example, competency, authority or credibility
each other in which there is no involvement other
Acuuals than the trade itself
An adjustment made to the accounts of a company
p,s
that has the effect of putting aside money for
Australian Standards contracts
future use. It can be an adjustment to sales or an
adjustment to costs As>ets
The value of everything an organisation owns
An accounting method in which indirect costs are Audit

assigned to activities used in the production of a A systematic inspection of a process or procedure to
product or delivery of a service. These activities are assess compliance with requirements or regulations
then used to apportion those costs to products and
trail
services in a way that gives a clearer understanding
A record, history or series of documents that
of the total cost of a product or service
provide evidence of a sequence of processes that
led to an outcome
An item bought for a single and non-recurring use
Back order
or purpose
Customer orders which can not be immediately
fulfilled and are awaiting future stock delivery/
Having the ability or tendency to adapt to different manufacture before fulfillment
situations
Balanced scorecard
An approach to measuring performance that looks
Solid particles that remain suspended in air as fog at multiple variables. The variables might be equally
or smoke important, or given different weightings to reflect
degrees of importance
The process or rule used by an IT system to perform Bar code

calculations, data processing or automated tasks An optical, machine-readable representation of data
Allocated overhead Barrier to

Overheads are the cost of things that are needed An obstacle such as finance or the need for a
to manufacture an item or deliver a service but certain skill that prevent a business from entering a
are not associated with just one product. The total market
127
Base price them over an agreed time period. This works in
The initial price of something without the added accordance w ith a ma nufacturing organisatio n's
costs such as handling, transport and profit production schedule
Batch quantity Blockchain technology

Amount of products produced at a time An encrypted network that stores records of a
transaction and communicates this to all other
Benchmarking
nodes or points within the network
Comparing an element of one business, such as
price, quality or service, against another Board meeting
Regularly held meetings between all the directors of
Bespoke
an organisation
Made or provided especia lly for a specific end user
Bottleneck
Best value
A specific stage in a process which slows down the
Th e best possible outcome from a procurement
flow of production and limits the overall output rate
process that gets the right balance between price
and quality Bottom line
An accounting term meaning a company's income
Bid
after all expenses have been deducted from
Offer of a price
revenues
Bidder (or tenderer)
Bounce back
A potential supplier w ho makes an offer (a bid is an
An automated e-mail sent in response to an e-mail
offer or tender)
or contact form
Bilateral trade agreements
Brand
An exchange agreement between two nations
The image of an organi sation. The name, logo,
or trading groups that gives each party favoured
sloga n, colours, etc., that differentiate it from the
trade status connected to certain goods obtained
competition
from the signatories. The agreem ent sets purchase
gua rantees and removes ta riffs and other trade Break even
barriers The point at which a business recovers what it has
spent and starts to make a profit
Bill of lading
A carrier's contract and receipt for goods it agrees t o Budget
transport from one place to another and to deliver Financia l plan for a set period of time on how much
to a designated recipient (consignee) can be spent
Bill of materials (BOM) Buffer stock

A comprehensive list of components, items, Amount of stock held in stores at any time in
materia ls and parts to create a product, essentially addition to actual req uirements
a recipe for the produ ction of an item
Business-critical
Biodiversity A supply or service without which th e business
Biodiversity is short for biological diversity. It refers could not operate
to a high level of t he variety of plant and animal
Business-to-business (B2B)
life in the wo rld or in a particular habitat - it is
A transaction between businesses (e.g., in the
considered to be both important and desirable.
supply chain)
Biomass
Business-to-customer (B2C)
Biomass is organic matter or plant material
A transaction between a busi ness and the end user
converted for use as a fuel (biofuel)
of its product or service (e.g., an individual shopper)
Biophysical
Business case
A branch of science concerned with the application
A justification for a proposed project or undertaking
of physical principles and methods to biologica l
on th e basis of its expected benefits
pro blems
Business cycle
Blanket order
The rise and fa ll over t ime of output in an eco nomy
An order that is placed w ith the supplier which
as measured by gross domestic product (GDP)
allows the buyer to call off quantities as t hey need
128
vievv
The buyer's perspective on a supply market and the A list of items for sale that often contains
suppliers and products in it descriptions, pictures, prices and availability
The physical act of placing orders to make a purchase A group of goods or services that have shared
characteristics
in
When people believe and support an idea Catej~oi·v aware
Understanding the market and risks associated with
CA
a particular commodity or service
The Chartered Accountant qualification
C1~rtilFic.'1te tJf
Ct\D
A document required by customs officials,
Computer aided design - drawings created using
identifying the country of origin of imported goods,
software
and certified by the supplier's country's designated
Call.off sd1odule authority, to authenticate the source of the goods
A schedule produced to state what amount of
Channel
products are to be delivered when
The way products and services get to the customer
Chernical process
The amount of money or assets available to be
A process in which chemicals or chemical
leveraged by a person or organisation, e.g., when
compounds are changed with the help of chemical
starting a company, or buying an asset such as
reactions
machinery
Chief t0Xe(::utive off:icer
costs
The most senior person in an organisation, with
Large, fixed, one-off expenses incurred in getting a
overall responsibility for its success
business or process operational
Chief <:1l'fker
Chief procurement officer or procurement
The purchase of an item that is a long-term asset
and supply director - the person with overall
such as a building or equipment
responsibility for procurement and supply within an
Carl:mn Disdt1sure Prrlie;:t organisation
An organisation working with companies and
Climate nr<mfin<'
cities to disclose the environmental impact of
Identifying risks to an asset, as a consequence of
major corporations in the interest of fighting
climate variability and change, and ensuring that
climate change
those risks are reduced to acceptable levels by
Cartel making changes
A group of companies claiming to act
independently, but actually acting together to
A system or process that, once started, does not
control prices by price-fixing, limiting supply or
allow new entrants. A framework agreement might
other restrictive practices
have multiple buyers and multiple suppliers, but
Cashable once set up no additional buyers or suppliers can
Savings that have no impact on the product or be added to it
service quality but which result in a sustainable
reduction in the budget for purchases of that item
The chemical formula for carbon dioxide which is a
flow statement colourless, odourless gas found in our atmosphere
An accounting document that summarises the
incomings and outgoings of cash in an organisation
A people-centred enterprise owned and run by
Cash flow and for their members, which either reinvests any
The amount of money moving in and out of a profits or returns it to their members
business in a particular period
129
Glossary--- - -- - -- - -- - - - - - - - - - - - -- - - - -- - - - - -- -- -
Cohesiveness Consumerism
Working together effectively A theory that encourages the increasing purchase of
goods and services
Collaborative
Working together for mutual benefit Continuing professional development (CPD)
Undertaking training or attending courses to
Collusion
develop knowledge
Where two or more potential suppliers (or the
purchaser and one or more suppliers) secretly Continuous improvement
co-operate to undermine the competitiveness of a An ongoing effort to improve products, processes
tender process and services
Combustion Contract
The process of burning a fuel so it reacts with A legally enforceable written or oral agreement
oxygen to relea se energy between two or more competent parties that
defines a job or service to be performed
Commercial
To do with business, intended to make a profit Contract clause
A singl e, usually numbered, paragraph in a contract
Competitive advantage
setting out the detail of a single co ndition (or 'term')
Putting an organisation in a strong position against
of the contract
their competition
Contract compliance
Conflict
Where items purchased conform to the agreed
A disagreement, or difference of opinions or
contract
principles
Contract management
Conflict of interest (COi)
Dealing with contracts w ith suppliers to make sure
Where an individual is unable to remain impartial
the terms of the contract are met
due to a personal, professional or public interest
Contract period/contract term
Conformance
In this context the contract t erm is the same as the
The meeting of a required specification or standard
contract period (i.e. the length of time during which
Conglomerate the contract operates). It begins with the START
Two or more corporations engaged in entirely DATE and ends with the EXPIRY DATE. The sta rt date
different businesses that fall under one corporate is not necessarily the date on which the contract is
group signed, but the date on which it comes into effect.
The expiry date may be expressed as an actual
Consignment
calendar date (preferred) or as a given number of
A specific quantity of goods being carried
months (e.g., 36 months) from the start date
Consignment note
Control chart
A document describing the contents of a
A chart that can be used to analyse how a process
shipment, prepared by a consignor (supplier) and
changes over time
countersigned by the carrier as a proof that the
carrier has received the goods for delivery Control measure
An action to reduce the potential likelihood that a
Consignment stock
risk will occur or the impact that it will have
Inventory owned by the supplier but held at the
buyer's premises Copyright
A legal right created by the law that gives exclusive
Consolidated deliveries
rights to the generator of the work
The practice of grouping deliveries with similar
products or products which have similar Core competencies
transportation requirements in one journey to Processes which are critical to an organisation
reduce the unit cost instead of ma king many single achieving success and competitive advantage
deliveries of the same item
Corporate governance
Consumer The mechanisms, procedures and processes that
An individual or organisation who pays an amount are used to control and direct an organisation
to consume goods or services
130
A business approach that contributes to sustainable
development by delivering social, environmental A database to keep track of customers, contacts and
and economic benefits for all stakeholders. The a record of transactions
CSR policy may cover fundraising for charity, ethical
Cu.storns
behaviour, social and environmental policies, etc.
The area of government that controls and
Cost tentrr~ administers policies and procedures for the import
Area of the business or budget to which the and export of goods
purchase needs charging
Decar'bonisation
Cost driver The reduction or removal of carbon dioxide from
Anything that means the cost of a good or service energy sources
will change
Decornrnission
Cost of goi>cis The activities performed to take a product or service
The direct costs for producing goods, i.e. the cost out of use and make it unavailable to customers
of the materials used, as well as the cost of the
labour to produce them and any other allocated
A downscaling of production and consumption
overheads. It excludes and distribution or sales
costs Demand
How much or many of a product or service
Costs
customers are prepared to buy at different prices
The amount of money that has gone out of the
business Oermmd tur11e
A graphical representation of how price changes
Counter offer
with changes in the demand for an item
A response to an offer that is different from the
original
The type, age, culture, interests and financial
Credit limit
position of people
The amount of money an organisation can borrow
from a creditor stock
Raw materials or component parts whose demand
Credit note
(ordering levels) is influenced by demand for the
A document issued to correct mistakes on an
finished product
invoice - a credit note reduces the amount owed on
the invoice document
The reduction over time in the value of an asset
Credit rntin1>
held by a company, often due to wear and tear. An
A score given to an organisation which is based on
amount for this is treated as a cost in a company's
the amount of risk they propose to the debtor
annual accounts
Cross <1ork1in
A logistics procedure where incoming products
The amount of money by which annual accounts
are loaded directly onto an outgoing carrier with
are adjusted to reflect the cost of a reduction in the
minimal handling and storage time
value of assets. This money is put aside to purchase
Cr1oso;-f1mi:ti:~n.~I teams a replacement for the asset at a future date
Teams that involve individuals from different
D<'1i'.lr<'c11ation of assets
departments that work together towards a common
An accounting method of spreading the cost of an
goal
asset over a defined period, usually several financial
Culture years
The shared values, practices and beliefs within an
organisation that determine how its procedures are
A detailed document that sets out the precise way
carried out and how it is run overall
that a product must be built or a service delivered;
Customer includes technical drawings, standards that must be
The person who purchases and pays for (but met and dimensions
doesn't necessarily use) a product or service
131
Glossary - - -- - - -- - - -- - - - -- - - - -- - - - -- - - - - - - - -- - - -
Devolve Dual-sourcing
Delegate or transfer power Using two or more suppliers for a product, splitting
demand between them, to keep pricing competitive
Direct call off
and ensure continuity of supply
The act of placing an order under a framework
agreement without having further competition Due diligence
Undertaking a thorough appraisal or conducting an
Direct cost
evaluation to establish al l t he facts prior to entering
Cost that is directly associated with the production
into an agreement
of a good or service
E-commerce (or electronic commerce)
Direct labour cost
Buying and selling goods and services, or
The salary cost for employees who work in the
transmitting funds or data, over an electronic
manufacturing process of an item or delivery of a
network, primarily the Internet
service
E-sourcing
Direct material cost
The electronic procurement of products or services
The cost of materials and components used in the
using Internet-enabled applications and decision
production of an item or delivery of a service
support tools. These tools facilitate interactions
Direct supplies between buyers and suppliers through the use
Raw materials and goods for use in production of on line negotiations, online auctions, reverse
auctions, etc.
Disclosure of gifts
Declaring gifts or hospitality re ceived from a Early adopters
supplier to ensure transparency of dealings A group of consumers who are the first after
the innovators to buy or use a new product or
Discretionary spending
technology
Spending by consumers on things they want to buy
rather than on things they have to buy such as food Eco-Management and Audit Scheme (EMAS)
and housing Designed by the European Commission to be
used to monitor and improve the environmental
Diseconomy of scale
performance of organisations
Where unit costs rise with rising output
Economic growth
Dissolved
The increase over time in the value of goods and
Ceased trading
services produced by a country, often defined as a
Distribution value per head of population
The process of moving materials or products from
Economic operator
one supply chain participant to another
A contractor, supplier or service provider that
Distribution channel operates in a particular market
The network used to get a product or service from
Economic order quantity (EOQ)
the manufacturer or creator to the end user or
The most economically viable quantity in which to
consumer. It can include wholesalers, agents and
buy stock which considers not only the material
retailers
costs, but also associated costs such as storage,
Dividend transport and administration costs
Money paid from the company's earnings to the
Economy
shareholder
The state of money flow, manufacturing,
Domestic distribution, availability and consumption, or
Private, not business scarcity, of goods and services, energy, labour, or
other resources at country level
Downstream environmental factors
Impacts on the environment caused as a result of Economy of scale
the use of the goods you are producing The trend of cost per unit being reduced as
output increases due to factors such as increased
Downtime
bargaining power and the cost of tooling being
Time when production or services cannot be carried
shared amongst larger numbers of units
out
132
~~h'1ct1'CH1ic d~ta to use and, where necessary, adapt and update
The exchange of data between companies in the software (provided that they can appoint
computerised format appropriately skilled personnel to do so)
Ernbedded carbon
The range of greenhouse gas (GHG) carbon Principles that govern a person's or an
emissions associated with the production process organisation's behaviour
Evaluatitm criteria
The act of someone stealing assets for which they The standards that a potential supplier needs to
are responsible meet
"""'''"ir1" market Ex1:h2irrn•e rate

A country that is progressing toward becoming The value of one currency compared with another,
more advanced, usually by means of rapid growth, which can vary from day to day
investment and industrialisation
e1n".:1J1u11~ contracts
Enl'orceable This expression has two meanings: a. to draw up
A court can compel those involved in the contract to formal contracts and sign/seal them, and b. to carry
fulfil their contractual obligations out your obligations under the contract
~"'"'"''"'«" resniurte
A computer system that analyses the current To make special requests and make additional
inventory, forecast demand and expected delivery effort to ensure goods are delivered in less than the
of new supplies to calculate demand and identify normal lead time
requirements from suppliers
Environmental l'rntecthm "'"'''"'-v Monitoring the progress of an order to ensure stock

A USA governmental regulatory agency is received as quickly as possible
The optimum price at which there is equal supply The person in the buying organisation who carries
and demand of an item out the expediting function in procurement, which
means following the issue of a purchase order or
contract from receipt of order by supplier, through
The value of the assets minus the value of the
to delivery, dealing with delivery problems as they
liabilities
arise
A hard-wearing, matt floor coating designed

Money spent on goods or services
to resist chemicals and disguise minor floor
imperfections
Costs incurred from travelling, staying in hotels,
eating out, etc., whilst carrying out your job
Adapting the workplace environment to the user,
e.g., ensuring chairs and desks are at a comfortable
working height, lighting is adequate for tasks, etc. The number/value of contracts a purchaser has with
a single supplier; it is a rough guide to how much
Escaiation '"'"'''' any difficulties faced by the supplier will affect the
A set of procedures put in place to deal with
purchaser
potential problems
fxrm''' terms
Escrow
Contractual terms that are agreed between two
In the context of computer software, an escrow
parties and written into a contract
agreement involves the supplier placing a copy of
the software source (original and updated) code External stakeholders
(i.e. the raw form of the software design) with a People, groups or organisations who don't belong to
third party. If the software supplier ceases trading, an organisation but are nevertheless impacted by it,
the purchaser will then be provided with the or have an impact upon it
source code, which will enable them to continue
133
Glossary----- -- - -- - -- - -- - - - - - - - - - - - - - -- - - - - - - --
Fast-moving consumer goods {FMCG) Force majeure

An organisation that makes products that sell Circumstances that cannot be foreseen which
quickly and at a low cost prevent a contract from being fulfilled
Feedback Forecasting
Information about the customer's views on a The process of using existing data to predict future
product or service demand for products or services
Fill rate Franchise

The percentage of orders fulfilled from available A joint venture between a person who wants to
stock within a set time start a business and a person who already had a
business idea registered. The franchisee buys the
Financial regulations
right to use the business idea from the franchisor.
Internal documents setting out how money is
McDonald's is a well-known franchise
managed within the organisation, including how
budgets are set, who can authorise expenditure Fraud
and, often, rules around what procurement Deception intended to result in personal gain
processes must be used
Free-trade area
Financial return A group of countries who have abolished tariffs,
The amount of money that is either made or lost quotas and other barriers to trade within the group
from an investment
Friction
Financial year The resistance that one surface or object
A twelve-month period of trading. Businesses' encounters when moving over another
financial years can start at any time as long as they
Fugitive dust
run for a complete year
Visible emissions released from sources other than
Finished goods stacks, e.g., dust blown from storage piles, road
Items that have been through the manufacturing dust, emissions leaking from the sides of buildings
process, are complete and are suitable for sale or open areas in buildings
First article inspection Full container load {FCL)

The process of checking a product manufactured A single delivery of goods that completely fills a
for the first time to determine that it meets design container
and specification requirements
Full truckload (FTL)
First in-first out (FIFO) The amount of freight required to fill a truck by
Items purchased first are sold first, e.g., an electrical cubic metres I feet or mass
component sold out of inventory would be issued at
Fully operational
the oldest or first price
Complete and working to full capacity, i.e. a factory
First-party audit would be built and producing goods
An inspection of an organisation by an auditor
Game theory
employed by the organisation (also known as an
The study of mathematical models that explain
internal audit)
how people co-operate or compete. It is used in
Fit for purpose economics and market analysis to understand
The product or service is capable of doing what it collaboration and conflict in negotiating situations
was designed to do
Gantt chart
Fixed asset A type of chart that shows the schedule of a
Something owned by an organisation that is used project. It can be tailored to work for procurement
to generate income - fixed assets can be property, milestones
machinery or land
Gated process
Fixed cost A project management technique in which a project
A cost that remains constant in the short term or process is divided into meaningful phases with
irrespective of production volumes checks and evaluations at the end of each phase.
The project cannot continue unless a gate is passed
Flat structure
A structure with few or no levels of management
134
(~t1e:; EH'Vli~i::;ion~; •m'"'"h""'' !--!jurricanc~
A report estimating the volume of greenhouse The measurement of the strength and destructive
gases produced capacity of a hurricane
(io live "'"'"" terr:ns

The date on which the contract starts Contractual terms that exist even if they are not
stated in the contract, i.e. the law of the land
Goods--in
An area in an organisation that receives and books
in deliveries Open-minded, without pre-determined ideas, and
taking all views into account
Gross amount
Total amount payable including taxes
A market structure where many companies are
(iross flo,me•sti£
competing but each is selling a slightly different
The total value of the output of businesses and
product
people in a country in a year
Gross national
Something conducted within an organisation by its
The total value of the output of businesses and
own workforce
people of a country in a year no matter where in the
world they are located Inclusive
Price for the whole amount, including taxes
Ma bi tat
An ecological or environmental area that is
inhabited by a particular species of animal, plant or A company that is treated in law as being distinct
other type of organism from its owner
Hard skills INCO terms

Specific skills that have to be taught, such as International commercial terms of sale that assign
learning to use a new computer system, or gaining a costs and responsibilities between the buyer and
professional qualification seller when delivering products
flardwarn lmlef]e111l1!nt demand stock

The physical parts of a computer Finished products whose demand (ordering levels)
is not dependent on other items of stock
A means of limiting the negative impact of an event

A collection of data that can be used for
comparison, e.g., The Dow Jones Index
A system where members of an organisation are
ranked according to their status or power im:lirnct cost/indirect snEmd
Costs that are not directly incurred in the
manufacture of a product or delivery of a service,
Pallet racking that extends to ceiling level. This will
e.g., insurance
require specially extended masts on forklift trucks
Indirect su1riplies
Services, tools and equipment that do not form part
A system of warehousing which looks to maximise
of the finished product but are required to maintain
utilisation of space using a system of pallets and
the business and production process, e.g., repairs,
shelves stacked vertically and the use of machinery
stationery, consultancy
such as forklift trucks to retrieve items
Home
Something offered to persuade or influence an
The first page you see when you open a website
individual to conduct themselves or business in a
1·1orizon certain way
A formal gathering of data and information from
various sources (and often of unrelated subject
A person's formal introduction to an organisation
matter) and combining it to predict approaching
and its procedures
risks or opportunities in order to support decision
making
135
Inflated In the public domain
Higher than necessary Generally known either by the public at large, or a
certain section of it; readily obtainable outside of
Input
the organisation
Resources used in the production of a product or
creation of a service that lead to the desired 'output' Inventory
(e.g., people, raw materials, information) The stock of goods, materials or products
Insolvent Inventory management

Unable to pay the money owed The process of ensuring the safe and efficient
storage and control of stock, including managing
Institute of Chartered Accounts of Scotland
demand and movement
(ICAS)
The world's first professional body of chartered Invitation to tender (or Invitation to treat) (ITT)
accountants Document inviting potential suppliers to quote for
business
Intangible
Something you cannot physically see or touch Invoices
Statements of what has been supplied and a
Intangible cost
request for payment
A cost to an organisation that is known but cannot
be quantified ISO
International Organization for Standardization
Integrated report
(www.iso.org)
A short document about an organisation's features
and how this creates value in the short, medium ISO 9000
and long term A set of international quality management and
quality assurance standards that help companies
Intense precipitation
effectively document and maintain an efficient
Heavy rain or snow
quality system. They are not specific to any one
Interest rate industry and can be applied to organisations of any
The percentage of money that is required to be size
paid back in addition to money borrowed, or the
ISO 9001
percentage of money that is gained in addition to
ISO 9001 is a document describing the
money saved
requirements an organisation must fulfill to meet
lntermodal the ISO 9000 standards
Shipments that utilise different modes of transport,
ISO 14001
e.g.. a shipping container carried by lorry to a dock
This sets out the international standards for an
where it is loaded aboard a ship
environmental management system
Internal rate of return
ISO 26000
The means by which an investment or project is
This is the international standard developed to
evaluated financially. It is the interest rate at which
help organisations in selecting and addressing their
the net present value of cash flows is equal to zero
social responsibilities
Internal stakeholders
IT network
People, groups or organisations with an inside
A computer network that allows computers or
interest in an organisation, including shareholders
systems to share data
and employees who own or work for the business
johari window
International Integrated Reporting Council (llRC)
A technique that can be used to help an
A global coalition that promotes reporting about
organisation (or person) improve their
value creation
understanding of their relationship with themselves
Interpersonal skills and others
Skills used when communicating and dealing with
joint contracts tribunal (JCT)
people
A family of standard contracts used in construction
in the UK
136
in tirne
A system that works alongside Lean manufacturing.
In order to reduce waste in the supply chain, JIT A procurement strategy to source from low-cost
makes sure that stock is not held unnecessarily in countries (LCC) either because of reduced production
inventory price, or improved capacity, quality, or logistics
i<aizen L11ad time

An approach involving continuous improvement. The lapse of time between placing an order with a
A long-term approach, that seeks to make small supplier and receipt of the goods
changes in processes to improve quality and
Lean
efficiency
A business methodology that aims to create more
i\ar:ban value with fewer resources
A production method where instructions are sent
lean
from one operation to the next on a card, including
Processes that improve efficiency by reducing
specific items and quantities. (Translated from the
wasted time, materials and money
Japanese, it literally means 'signboard' or 'billboard').
The aim is to reduce waste through over-production curve
A graphical representation of how when greater
custtimer
numbers of an item are produced, unit costs reduce
A method of splitting a company's clients into
groups so that marketing efforts can be more
focused. It is often based on demographics such as A book or computer file used to balance accounting
age or geographic location or on buying behaviour figures such as deposits and receipts
im:lkator less than container load

Values that can be measured or monitored to A single delivery of goods that does not completely
assess levels of achievement fill a container. This may incur additional charges
Protocol Less than truckload

International treaty which commits state parties to A shipment containing fewer items than are
reduce greenhouse gas emissions required for the shipment to be eligible for full
truckload rates
The last group of consumers who buy or use a new letter of credit
product or technology A document used between a buyer's and seller's
bank to facilitate a transfer of funds upon
landed cest
performance of the contract and presentation of
Cost of a product plus the relevant logistics costs,
specified documents, e.g., signed delivery note
such as transportation, warehousing, handling, etc.
landfill
The amount a business owes, e.g., loans, debts,
Landfill is a system of garbage disposal in which the
accounts payable
waste is buried between layers of earth which has
the effect of building up low-lying land Liable
Legally responsible for any actions taken that may
Last in-first out
have a negative consequence
Items purchased last are sold first. As these items
are likely to be higher in value, the remaining ife-cycle assessment
inventory has a lower value A technique to assess the environmental impact
of each step in a product's life from raw material
law ()f demand
extraction through to the use, repair and
The quantity of an item purchased varies inversely
maintenance of the product (also called a life-cycle
with its price, other factors remaining constant
analysis or a cradle-to-grave analysis)
law of ~"',l'l''Y ur12-rvc1e cost
As the price of an item increases the supply of the
The total cost involved in items of inventory,
item will also increase, other factors remaining
including purchasing price, inward delivery, receipt
constant
137
Glossary
and handling, storage, packing and preparation, Market

despatch costs, insurance and overheads Where buyers meet sellers to trade prod ucts and
services. This can relate to a specific location or to
Life-cycle plan
the general economic environment
A plan addressing the impacts on the various stages
of staff, products and environment life cycles Market analysis
This helps procurement professionals to
Lifetime cost
understa nd how the supply market works, the
The total cost of ownership over the life of an asset
direction that the market is going in, t he level of
Linear pricing competition and the key suppliers in the market
The unit price doesn't change according t o the
Market factors
quantity purchased
Elements that influence the demand for, or the
Liquidated damages price of, a good or service
A set sum agreed by the organisation and the
Market knowledge
supplier (the parties) and is included in the contract,
A detailed understanding of the influences, activities
which w ill be paid if one of the parties breaches a
and trends in the market for a particular product or
term of the contract
service (also known as category knowledge)
Liquidation
Market price
A form of insolvency when an organisation is
The amount that customers are charged, depending
brought to an end
on supply and dem and for the products or services
Logistics
Market saturation
The control of the flow of goods or services between
This usually means that there is more than enough
two points
supplier capacity to meet customer dema nd
Long tail spend
Market segment
The part of an organisation's spend profile that isn't
A group of consumers with common characteristics
managed directly by the procurement department
that are grouped together for the purpose of
Loss leader marketing a product or service
A product or service delivered at a price that makes
Master production schedule (MPS)
a loss for the supplier in the hope of future ga ins;
A pl an that a company has produced for the
usually used to break into a new market or to
pu rposes of scheduling machinery, staffing,
increase m arket share
resourcing, etc., that is used to ensure smooth,
Macro environment continuous productions
Externa l factors beyond an organisation's contro l
Material assets
that will influence its success, such as government
Tangible items that are required to carry out an
policy, technology, and social and cultural factors
organi sation's activities, such as tools, machinery,
Make-to-stock staff and build ings
Where an item is produced specifically to go into
M aterial requirements planning (MRP)
stock, for later sale
An electronic system used to plan production which
Make or buy includes scheduling orders, monitoring inventory
A decision about what products or services and managing the production process
an orga nisation will manufacture or provide
Materials management
themselves in-house, and which will be pu rchased
The part of the procurement process t hat makes
from outside sources
sure organisations have t he materials they need to
Manual handling operate
The transport or support of any load by one or
Maverick spend/ off-contract spend
more employees, including lifting, putting down,
Where loca l staff ignore existing contractual
pushing, pulling, carrying or moving a load
arrangements and purchase from other suppliers.
Manufacturing resource planning (MRPll) This may be for fraudulent reaso ns, but most
A computer-based inventory management system often it is simply beca use they believe they can get
that combines all available strategic and planning a better deal and do not underst and the overa ll
data to support inventory forecasting impact on the business
138
Milan
Another name for the average. The mean is A situation in a market where one organisation
calculated by adding all of the values together, then controls the supply of goods or services and new
dividing by the number of values entrants find it difficult to enter the market
Method stat~ment
A plan or procedure that details how a process or A market with only one buyer
task will be carried out
Micro 1511vlrmm1ent Paid work from a second job that is done without a
Factors that directly influence an organisation's main employer's consent
success, such as competitors, suppliers, employees
Movements
and customers
A shift in demand or supply, or price
Mi·crcr-. Small am! Medium
Multilateral trade ""''e<>1m
The expansion of SME to include microbusinesses,
An exchange agreement between more than two
which are usually defined as having fewer than ten
nations or trading groups that gives each group
employees
favoured trade status connected to certain goods
Middle M"'i"'·i•" obtained from the signatories
A group of consumers who buy or use a new
product or technology after seeing it used
In or using several different languages
successfully by innovators and early adopters
Mileston~:s
Organisations that have facilities and assets in more
Important stages or events within a process
than one country
Net amount
A limited tender exercise, usually only on price,
Total amount payable excluding taxes
under the rules set out in a framework agreement;
only suppliers appointed to the framework are able New
to take part A family of standard contracts used in construction
in the UK
Minimum
The smallest amount of a product a buyer can order l\lon-cashable
from the supplier One-time savings that do not reduce the ongoing
future budget
Minutes
A written record of a meeting, stating when it took
place, who was present, what was discussed and A nonprofit organisation that operates
what actions have been agreed independently of any government
Mission statement Non-linear oridne

Short statement setting out an organisation's The unit price does change as the quantity ordered
purpose changes
itlt~ating action communi(;ations

An action that reduces the severity of an outcome Using pictures, facial expressions or body language
to convey information
Mixed
This is where a vehicle contains more than one type
of product In the context of data, something is objective if it is
pure fact, with no opinion or interpretation attached
Mobilisation
to it
When a contract shifts from one supplier to another
In terms of a contract, the actions that each party

The act of forcing people to work in poor conditions
must carry out
for little or no money
139
Glossary-- - -- -- -- - -- - - -- - -- - -- - - - - -- - -- - - - - --
Obsolescence Ordering system

The state of becoming discontinued, outdated or no A method used to determine the size and timing of
longer useful an organisation's orders
Obsolescent stock Organisation

Stock that is outdated and no longer useful A body that buys goods or services from a supplier
Occupational Health & Safety Agency (OHSA) Organisational culture

A USA governmental regulatory agency The shared values and beliefs that influence how
people in an organisation behave
Off-the-shelf
Goods or services that are readily available and not Original equipment manufacturer (OEM)
made to order A manufacturer that produces goods for another
company to sell under their own branding,
Offer
particularly computer and IT equipment
An invitation communicated by one party to
another to enter into a legal contract Oscillating
An object that oscillates moves repeatedly from one
Officers
position to another
Positions appointed by the Board of Directors.
Examples of officers are CEO (chief operating Outcome-focused specification
officer) and FO (financial officer) Type of performance specification that describes
the functions or performance that a product must
OJEU
fulfil
Official journal of the European Union
Output
Oligopoly
The amount of goods or services an organisation is
A market structure where a small number of
producing or supplying
competitors dominate the market
Outsource
Open-book contract
Contract another company to undertake a task or
A contract in which both the purchaser and supplier
job
share all financial information relating to the
contract, including figures that would normally be Over-spec'd (over-specified)
considered commercially confid ential Having a specification that is better than is required
to be fit for purpose
Open account
This is an arrangement where the items are Over-supply
delivered before payment is due, for example, on Where more goods or services are available than
credit terms such as 30 days there are buyers for them . This most often occurs in
agriculture where the harvest may vary from year to
Opening stock
year, depending on the weather, and the produce
The amount, type and value of goods available for
cannot be kept for a long time
sale at the beginning of a set period
Overdraft
Operating costs
A short-term agreement with a bank to lend money
Day-to-day expenses of running an organisation,
e.g., rent, salaries, transport costs, power and Packaging
insu rance The process of covering an item in a specified
material to protect the item and in some cases
Operating environment
make it more appealing to the customer
Everything external to the business that has
an impact on how it operates. This will include Packing list
regulations, social expectations, the economy, its An itemised list of a package's contents which is
relative position in the market, the competitiveness prepared by the shipper
of the market, etc.
Packing
Opportunity cost The process of preparing goods for storage or
A benefit that could have accru ed if a person had distribution by protecting the content s from outside
taken a different action elements
140
Palh't
A platform used for storing and moving stock The process of selecting items from stock or
assembling the items required to fill an order
Pallv.:tisation
Performing material handling tasks, such as storing
and shipping products, using pallets Price per individual item
Pitch
To be involved and contribute to the task or project A business case delivered to an organisation to try
to sell a product or service
A legal form of a business that is owned by two or

more individuals Passing off another person's work as your own
Patented Positive-sum game

The inventor has been legally granted exclusive Gains by one person or party do not equal the loss
rights to make or sell their idea or invention to the other
Pi'Atent i> """"' ''"'' !l n e

Legally grants the inventor sole rights to make or The minimum level of income required by a family
sell their idea or invention to cover the basic needs of food, clothing and
shelter
Pa·vrr1er1t terms
The time in which a buyer has to pay the supplier Personal pnltcict1ive
for goods or services received Equipment such as a hard hat, work boots or a high-
visibility jacket
Perfect 101mr"'''1il·i11n
A market structure where many companies are
competing, each selling the same product A document sent to potential suppliers asking for
information necessary to support their qualification
Performance
as an approved supplier
A term used in contract law to describe what should
be done
Match a certain set of criteria to qualify immediately
P~1rformante 1mim1ge·m~mt
for invitation to tender or request for information
Any activity that is carried out to make sure goals
(RFQ)
are achieved
Preferred list
Performance mima,i<e;me
A pre-approved list of suppliers whose financial
A series of standards and targets that are to
stability and technical capability have already been
be achieved by the supplier, definitions of how
checked
performance against those standards will be
measured and actions expected to be taken on the
basis of the measurement results A pricing strategy that aims to attract customers
away from competitors by offering a lower price
l'erfornumce <n<'d1fkatiio
Outlines what the product or service is to do or
achieve - this covers its output requirements, A pricing strategy that markets products in the early
tolerances and functions it may have to perform stages of their life cycle at a higher price than at a
later stage
An area that surrounds a metropolitan area or city Prin' e1<1st;;c111y

A measure of the change in demand for a product
l'ersonalimnr1n111>m,,,n1t
or service in relation to changes in its price
A type of action plan geared towards personal
improvement Price on ap1pli1:ati
Meaning you can find out the price when you
cash
contact the organisation
Money readily available for use by employees on
small items Price vo1<n:m1:y
Prices that rise and fall repeatedly and
Photovoltaic
unpredictably over short periods of time
Energy generated using solar cells
141
Glossary---- - - - - - - -- - -- - - - - - - - -- -- - -- - -- - -- - -
Pricing model Product life cycle

How the pri ce for goods or services will be The stages a product goes through, from initial
presented in a request for information (RFI) concept through to decline and removal from the
market
Pricing schedule appendix
Additional pages, containing more details about the Profitability
pricing schedule, at the end of the contract The ability of the organisation to make a profit
Primary packaging Profit

The packaging that is in immediate contact with the The amount by which the revenues of a company
product (e.g., small box, bottle, bag, etc.) exceed its costs
Primary sector Proforma invoice

The first stage of the production and manufacturing A document which confirms the sale which is sent
process (e.g., farming and the extraction of raw to the buyer in advance of items being shipped
materials) and provides details such as description of items,
shipment weight, transport charges, etc.
Private limited company (Pie)
A legal form of company in which ownership is Promotional mix
apportioned through the number of sha res held. The aspects of product, place, price and promotion
Liability of the holders of these shares is limited to that are used in the marketing of a product or service
the share value and the shares cannot be traded
Propulsion system
Private sector A machine that produces thrust to push an object
Organisations run with the aim of making a profit forward
Proactive Prospective suppliers

Anticipating needs and acting accordingly Suppliers that may wish to work w ith a buyer or
who a buyer may wish to work with
Probity
Honesty or integrity Prototype
A samp le or model of an id ea or concept
Process mapping
A way to provide a visual representation of a Public limited company
process A legal form of company in which ownership is
apportioned through the number of shares held.
Procure to pay (P2P)
Liability of the holders of these shares is limited
The process of requisitioning, purchasing, receiving,
to the share value and the shares can be traded
paying for, and accounting for goods and services
through an exchange
Procurement
Public procurement
The act of obtaining something, whether tangible or
Purchasing carried out by government departments,
intangible, such as a product or service
loca l authorities and some other designated
Procurement platform types of organisation, particularly those f unded or
The activities that determine the specification supported through taxation
and quantities of a product or service prior to
Public sector organisations
contracting for its supply. It is based on a balance of
Service organisations run by the government and
financial and non-financial requirements
usually funded by taxes
Procurement specification
Purchase order (PO)
A document that presents prospective supp liers
Lega lly binding documents that set out the details
with a clear, accurate and full description of the
of the transaction that the supplier and buyer have
organisation's needs and enables them to propose
agreed
a solutio n to meet those needs
Purchasing
Product label
The processes concerned with acquiring goods and
Part of the packaging of a product. The product
service s, including paym ent of invoices - it is part of
label is the written information on the outer
the wider procurement process
packaging that gives important information that
needs to be communicated to the customer
142
bid
A bid where the potential supplier has 'exempted Something that is the same on both sides
themselves' from one or more of the requirements
Rc~cruitrttf:nt
of the tender (i.e. the bid specifically states that it
The act offinding a person or persons to do a role
does not comply with one or more aspects of the
within an organisation
specification or contract terms)
Redtmdant stock
Excess stock that is not required
Measured in terms of quality
Quali:tative research
Statistical methods used for predicting what will
Research designed to gain insights into reasons why
happen in one variable as a result of a change in
something happens
another - e.g., will quality improve by X amount if
quam:y assurance the price is increased by Y amount? Quality is not
Processes put in place the ensure that quality a direct function of price, so it may do so, or it may
requirements will be met not. Regression analysis looks at probabilities
vu<im.v control
Checking a product against a set of criteria to A model that policy makers and others can use to
ensure it meets quality standards reform and apply regulations in an effective and
logical way
A formal system that includes documented Remedies

processes and procedures that outline the Contractual remedies are the provisions in a
responsibilities for achieving quality within an contract that enable the injured party to take action
organisation when the other party does not comply with the
contract terms
Measured in terms of numbers or quantity Remittance advice

A document confirming that payment has been
01:1ar1til:i'lthm re5eii.rd1
made
Research that uses statistics and mathematics as a
means of analysing data
To procure again - put in place a new contract when
a previous one expires or is terminated
A limit on the quantity or value of a particular type
of import or export ""''ll'-''8" for inforrnatitm
A document used to gather information about
Radio identification
suppliers and their capabilities prior to a formal
Data chips that are attached to products and
procurement process
contain a signal for tracking and identification
for
A document used to canvass potential solutions
The process of reviewing products and
from suppliers when the specification is still unclear
consolidating variety to reduce inventory costs
for
An invitation to suppliers to bid on specific products
Redesigning existing products and services
or services
Reactive
for tendev·
Responding to needs when they present themselves
Document inviting potential suppliers to quote for
Read re<:eliit business
A response from an e-mail recipient that indicates
the message was opened
Paper or electronic document stating a need for
Rebate procurement to supply a product or service
An amount paid back on top of any discounts that
have previously been agreed
143
Residual waste Scanner
Waste that is not able to be recycled or re-used and A device that optically scans images
w hich ends up in garbage dumps called landfills
Schedule of rates
Return on investment (ROI) An itemised list of component parts within a lump-
A measure of profitability that indicates whether a sum contract, or a list of individual products, giving
gain or loss has been generated compared with the a price for each unit
initial cost
Schematic
Revenue A diagram showing the main form and features of
The amount of income that has come into a something to help people to understand it
business
Scorecards
Risk assessment Reports used to track the achievement of, or
An assessment that considers the severity of a progress towards, targets or goals that can include
hazard and its potential outcome in conjunction quantitative and qualitative data
with other factors including the level of exposure,
Search engine
the number of individuals exposed and t he risk of
A software system or program that is designed to
the hazard being realised
search for information on th e Internet
Risk register
Secondary sector
A document that sets out ident ified risks, the
The second stage of the production and
likelihood and impact of them materialising and
manufacturing process, e.g., manufacturing
who is responsible for dealing with them
industries
Road safety impact assessment (RSIA)
Second-party audit
A formal, independent assessment of the impact
An inspection of a supplier by an organisation/
of new or altered layouts and entry points on the
company contracted by the organisation (otherwise
safety of a roa d
known as an external or supplier audit)
Roll-over contract
Self-assessment tool
Contract that automatically renews on expiry unless
An evaluation method that an organisation will use
notice is given t hat it is not to do so
to assess performance
Roller-stacker shelf mechanism
Sensitive receptors
A set of rotating decks or shelves within a secure
People or living things that are more readily affected
container that eliminates wasted space between
by exposure to contaminants or toxic material s, e.g.,
racks and improves security
people in schools, day-care centres, hospitals and
Safety stock nursing homes
Extra stock t hat is held in case it is needed in
Service credits
unexpected situations, such as demand ri sing or
A deducti on against fees payable as compensation
suppliers being unable to deliver
for poor service, usually a pre-determined
Sales and operations planning (S&OP) percentage derived from a contractual performance
A multi-department planning process based on management framework
factors incl uding expected levels of demand and
Service level agreement (SLA)
supply
An agreement between a supplier and a buyer
Sales tax based on quality, delivery, ava ilability and other
A tax collected by the retailer at the final stage of measurable criteria
the supply chain
Service sector
Samples The third of three sectors recognised by economists.
Examples of t he product that is required The first sector covers farming and raw materials,
the second is manufacturing and the third covers
Scalability
the production and delivery of servi ces
An organisation's ability to increase its production
profitability
144
The means by which a business is apportioned A detailed description of what is required
among its owners
Shift Gathering, cleansing, classifying and assessing

A change in either the quantity supplied, or the spend data, with the aim of making efficiencies
quantity demanded while the price remains the and reducing costs
same
add~·ess; One-off purchases or immediate requirements,

The address to which deliveries are to be sent common in domestic buying
floor
Within manufacturing, the area where the goods Payment split into instalments across the period of
are made the contract
Si!,.·1ed off
A process of approving a sample so that orders can This is where a full order is broken down into
be placed or produced smaller loads and delivered against a schedule, e.g.,
40% delivered in Month 1, 60% delivered in Month 2
Silo
When people within a department do not share Stilketmlder
their knowledge or ideas with others outside the Anyone with an interest, or stake, in the
department organisation or project
admini~trative document
A standardised customs form used to control goods A statistical measure that captures the difference
being moved in and out of the EU, Switzerland, between the average and the outliers in a set of data
Norway, Iceland, Turkey, Macedonia and Serbia
Document setting out the internal rules of an

The process of identifying the most efficient organisation
placement for each item in a warehouse
Small- and medium-sized ente1Tir1s.> An action that is required by and controlled by law
A small- or medium-sized enterprise that is
independent of other companies and is defined in
Care and responsibility for minimizing a product's
terms of the number of employees it has
environmental impact throughout all stages of the
SMART product life cycle, including end of life management
SMART objectives are: Specific, Measurable,
Stock
Achievable, Realistic, and Time bound
Goods, products or materials held for future use or
Soda! su:staim1 supply, often called inventory
The impact a business can have on people and
StockhCllder
communities and actions to make this a positive
American term for shareholder
impact
Stock unit
$(»ft skills
An identification code for an item of inventory,
Skills that may be taught but are more likely to
usually displayed as a bar code linked to a
develop with time and practice, for example, team
database
working and good communication
Stockout
SClftware
When an inventory item is unavailable
Programmed code that makes computers
(hardware) operate Stockta ke
The process of physically counting products in a
Sole trnder
warehouse to match them to the computerised
Someone who has exclusive ownership of a
inventory
business and can keep any surplus profits but is
responsible for any losses
145
Strategic business decisions Supply chain
Long-term decisions often made by senior A network of individuals, orga nisations, technology,
management which affect the future and direction activities and resources working together to make
of an organisation sure goods or services reach the end user
Strategic core Supply organisation

A category of a buyer's portfolio in w hich items have A supplier
major consequences for the compa ny if th ey a re
Sustainability
not available when needed
Supporting future ecological balance by not
Strategic plan harming the environment or depleting natural
A document that includes details of the resources
organisation's goals and the actions to be taken to
Sustainability development goals (SDG)
achieve them
17 goals introduced by the United Nations General
Strategic procurement Asse mbly to achieve a better and more su stainable
The practice of focusing on building long-term future for all
relationships with suppliers that could lead to a
Sustainably
source of competitive adva ntage
In a way that avoids the destruction of nature and
Strategic helps to keep a good ecological balance
High-level planning, usually related to long-term
Synchronisation
goals
The process of precise ly co-ordinating or matching
Subjective two or more activities, devices or processes in time
In the context of data, som ething is subjective if it
System-generated reference number
is a matter of opinion, wh ich may differ from one
A reference number automatica lly assigned to a
person to anoth er
record in a computer system
Substitutes
Systemic
Goods which, as a result of changed cond itions,
An attribute that applies t o a whole system rather
may replace each other in the m arket
than one particular part of it
Subtract or outsource
Tall structure
To employ another organ isation to fu lfil a contract
Also known as a hierarchica l structure and based on
or pa rt of a contract
a pyramid - every staff member has somebody to
Supplier inspection report to
A way of testing a supplier's product or service to
Tangible
confirm compliance with the standard set by the
Something you can physically see or touch
organisat ion
Target audience
Supplier ranking
People or organisations at which products such as a
A priority order of suppliers t hat can be used for
f ilm, advertisement or website is aimed
sourcing
Tariff
Supplier relationship management (SRM)
A tax paid on a particular type of import or export
Process for identifying all interactions with key
suppliers and then managing them in a way that Technical (or conformance) specification
increases the va lu e from the re lationship for both The set of standards that a requ irement must meet
parties or exceed
Supplier relationship manager (SRM) Technology chasm
The role responsible for developing and mai ntaining The gap between the ea rly adopt ers and larger
supplier relationsh ips market segments such as ea rly majority in a
product life cycle
Supply
How much or how many of a product or service Telematics
an organisation has to se ll, or, the act of physically Information technology dea ling with the long-
getting something from the supplier to the buyer distance transmission of computerised inform ation
146
Tende-r TtJtal (;os;t rrf n1Mw'-vd1
A request from a buying organisation to invite A structured approach to calculating the full costs
suppliers to formally quote on a large value project associated with buying and using an asset or
acquisition over its entire life cycle
Term eontracts;
Contracts written to last a period of time and
include agreed terms The total amount of costs spent, including fixed,
variable, direct and indirect costs
"''''tti'm' sectot
The third stage of the production and Total
manufacturing process, where a service is delivered Efforts of all departments within an organisation to
in industries, e.g., banking, communications and improve processes, products and services
marketing
Trade
Te§timonial An organisation that represents and works for a
A formal statement from a customer giving particular group of individuals or companies, with a
feedback about the product, service or company specific industry focus, is usually funded by them
and often used for promotional purposes
Traffic
The Carbon Trust Visits or clicks on a website
An independent, expert partner of leading
organisations around the world, helping them
Pre-supposed and beyond practically gained
contribute to and benefit from a more sustainable
experience
future through carbon reduction, resource
efficiency strategies and commercialising low
carbon technologies An organisational change that is significant and
carried out over a period of time
The Greenhouse Gas Pmtocol
r:omnn,te Standard
The most widely used international accounting Operating in such a way that everyone can see the
tool for government and business leaders to actions performed
understand, quantify, and manage greenhouse gas
Tu mover
emissions
The amount of money taken by a business in a
Tt11rnl-Darl1v audit particular period
An inspection of an organisation by an independent
company or body
Clear and not open to interpretation
The use of third-party businesses to outsource

A company in which there is no legal distinction
part or all of an organisation's fulfilment, logistics,
between the company and its owner
transport, warehousing or distribution
"Thinl-sector
A group of workers joined together in a specific
Not-for-profit, non-governmental organisations
type of organisation for the purpose of improving
run with the aim of achieving social goals, such as
working conditions
charities or community groups
Threshold Unit
A standard unit that combines individual items to
In the procurement context, an upper limit to the
ensure easy and efficient handling
amount a contract may cost without certain legal
requirements coming into force Up-skill
Increase the ability of an individual through training
and personal development
Cutting tools, moulds, fixtures of accessories
needed on a machine to manufacture a product Uo<:tr·1,am e11virn11mental factors
Total cost ;mnn1;u·h Impacts on the environment caused by the
extraction of raw materials or the manufacture of
An approach that considers all the costs associated
goods being purchased
with procuring an item
147
Value added tax {VAT) Warranty
An indirect tax collected by sellers at every stage A promise made by the suppli er to the buyer, in
in the supply chain, based on the value added at return for a monetary sum, to repair or replace
each stage of a product's or service's production or a produ ct or service without fu rther cha rge in an
distribution agreed period of time
Value propositions Water purification

The attributes of a product or service that makes it The process of removing chemicals, bio logical
attractive to customers co ntaminants, suspended solids and gases from
contaminated water
Variable costs
Costs that change with the output of the Waybill (or airway bill)
organisation A bill of lading issued by an airline certifying t hat
items carried comply with standards set by the
Variant bid
Internationa l Air Transport Authority (IATA)
A tender offer that does not quite match the
specification of contract terms, but has been Wearing parts
authorised as a secondary offer from a supplier. Parts with a limited lifespan that need replacing
It is used to see if the proposed specification periodically
and contract terms can be improved upon via
Whistle-blower
competitive offers and must be authorised by the
A person who discloses activity or information
purchaser as part of the invitation to tender
which they believe to be illega l, unethical or not
Vendor-managed inventory in accordance w ith the organisation's policies and
An agreement between an organisation and a procedures
supplier where the supplier is given control of
Wire transfer
ordering (replenishment) decisions
A method of transferring funds electronically
Venture capitalists from one person or entity to anot her using bank
Specialist companies that invest in businesses accounts
(particularly st art-ups)
Word-of-mouth
Verbal communications The informal sharing of information between
Using the spoken or written word to convey people
information, for example face-to-face or on the
Working capital
phone, reports, e-mails or posters
Capital of a busi ness that is used in its day-to-day
Vertical integration trading operations, calculated as the current assets
When one organ isation in a supply chain moves minus the current liabiliti es
into a different stage of that supply chain, either by
Work in progress inventory
sta rting its own business or by acquiring an existing
Assets that are being used in the production
one
process, which may include raw materials, labour
Violation and overheads
Breaching an agreement, policy or code of conduct
Zero-sum game
Vision statement A 'zero-sum ga me' is an interaction w here every gain
A statement describing the future desired state of by one person is an equal loss to the other, so t he
the organi sation net gain (the total of the benefit s to both parties) is
zero
Waiting time charge
Charge applied by a supplier if their specified
waiting time to be offloaded is exceeded
Warehouse slotting
The process of assigning identity codes to picking
locations based on various criteria such as unit
sa les, size or weight
148
Index
Acceptance, contracts 68-70 counter offers 68-70

Achievable, SMART criteria 22-23 customer portals 107
Adams v. Lindsell (1818) 69 definitions 65-70
Administration departments 34, 37 documentation 65-79
Agencies, credit rating 90-98 invitation to treat 67-70
Agreements see Contracts key performance indicators 75-76
Assets 92 law/legal aspects 65-70
Available credit 107 pricing 50, 53-65, 78-79
Awarding contracts 41-42 purchases 15,20,65-79
quotations 70, 72-73
supplies 15, 20, 65-79
tendering 70-73
B2B see business-to-business
termination 69-70
B2C see business-to-consumer
terms 76-78
Balance sheets 95-97
types 46-53
Bankers Automated Clearing Service (BACS) 89
Corporate social responsibility (CSR) policy 84-85,
Base price 50
108
Batch quantities 99
Cost-plus pricing 59-61, 112, 118-119, 124
Battle-of-the-forms 77-78
Cost-reimbursable pricing 59-61, 112, 118-119
Bel bin's team roles 17, 32-33
Costs, definitions 91
Bell (1961) case 68
Counter offers 68-70
Bespoke services 11
County Court judgements (CCJ) 92
Bindley (1862) case 69
Credit availability 107
Blanket orders 51-52
Credit limits 91
Board meetings 24
Credit rating agencies 90-98
Bounce back 88
Credit rating scores 90-93, 98, 108
Brand 35
Crittenden (1968) case 68
Breakeven 6, 57
Cross-functional teams 32-33, 37, 71
Budgets 101
CSR see corporate social responsibility
Buffer stock 99
Culture aspects 24-25, 27-28, 84-85
Business-to-business (B2B) e-commerce 88-89
Customer service departments 34, 37
Business-to-consumer (B2C) e-commerce 89
Customers
Butler Machine Tool Co Ltd v. Ex-Ce//-0-Corporation
contracts 107
(1979) 78
credit rating agencies 90-98
Buy into 24
customer details 106
information sources 81-11 O
c Internet 82-90
Call offs 10, 51-53 portal sites 102, 104-1 07
Capacity, contracts 65 search engines 82-87
Capturing data 101-102 websites 87-88
Carter's 10 Cs 41-42
Cash flow 57, 96-97
CCJ see County Court judgements
Data capture 101-102
Collaborative contract pricing 62
Database systems 107-109
Commercial contracts 53-65
Demographics 11-12
Confidentiality agreements 104
Differentiation
Conformance specifications 74-75
organisations 30-33, 37
Consideration, contracts 66-67
procurement and supply 38-44
Contracts/contractual agreements 45-80
Direct costs 60, 116
acceptance 68-70
awards 41-42
149
Direct supply 103 H
Dissolved status 94
Handbooks 104
Dividends, definitions 96
Handy, Charles 27-28
Documentation, contracts 65-79
Hard skills 24
Domestic contracts 58
Herzberg's theory 16
Due diligence 93
Hierarchical structures 27-28
Hierarchy of Needs 14-15
E Home pages 87
Economics/economy 2, 23 HR see human resources
Electronic commerce (e-commerce) 88-90 Human resources (HR) 34-35, 37
Electronic data interchange (EDI) 104 Hygiene factors 16
Electronic gateways 105
Electronic signatures 90
E-mails 88
Impartial research 84
Enforceable by law 46
Implied terms 77
Environmental factors 12, 23, 84-85
INCO see International commercial terms
Ethical behaviour/factors 23, 84-85
Income statements 91-92
Evaluating suppliers 40-41
Indirect costs 60, 116
Ex-Ce/1-0-Corporation (1979) case 78
Indirect supply 103
Expenditure, data capture 101-102
Individual organisation publications 93-98
Expenses 6
Individuals with capacity 48
Express terms 77
Individual's objectives 23-24
External stakeholders 18-20
Inflated prices 57
Informal organisations 29-30
F Information sources 81-110
Felthouse v. Bindley (1862) 69 credit ratings 90-98, 108
Finance CSR policy 84-85, 108
contracts and pricing 54 customers 81-11 O
organisation functions 34, 37 database systems 107-109
public sectors 3 e-commerce 88- 90
Financial reports 94-98 expenditure data capture 101-102
Financial stability 85 Internet 82-90
Financial year 94 organisations 84-87, 93- 98, 103- 104
Fisher v. Bell (1961) 68 portal sites 102-119
Fit for purpose 74 procurement systems 98- 110
Fixed costs 56 publications 93-98
Fixed fees 60 purchase ordering systems 99-102
Fixed pricing 55-57, 78, 112-114, 123 search engines 82-87
Flat structures 26-27 suppliers 81-11 o
Formal organisations 28, 30 websites 87-88
Framework arrangements 50-51 Information technology (IT) 35, 37
Franchises 5 Insolvent 94
Fully operational, definitions 64 Intangible 8
Functions within organisations 30-44 Integration, organisations 30-33, 37, 49
Funding, organisations 3, 6 Intention, contracts 46, 66
Internal stakeholders 18-20
G International commercial terms (INCO terms) 105
Internet 82-90
Goods
Interpersonal skills 37
contract documents 15, 20, 65-79
Inventories 9-11
pricing 111-126
Invitation to tender (ITI) 41
Google 85
Invitation to treat 67-70
Grainger and Son v. Gough (1896) 68 Invoices 106-107
Growth, orga nisation s 15, 20, 22
ISO 9000 standards 104, 108
IT see information technology
ITI see invitation to tender
150
demographics 11-12
differentiation 30-33, 37
functions within 30-44
Key operating functions 30-44
information sources 84-87, 93-98, 103-104
Key performance indicators (KP ls) 75-76 108
integration 30-33, 37, 49
Klein wort Benson Ltd v. Malaysia Mining Corporation
key operating functions 30-44
Bhd (1989) 66
location of 11-13
objectives in 20-25
L operating functions 30-44
Law/legal aspects operation procedures 13-30
contracts 65-70 people in 14-20
electronic commerce 89-90 publications 93-98
enforceable by law 46 sector types 2-13
STEEPLE framework 23 structures 26-33, 103
see also individual cases supply chains 42-44
Lead times 99, 108 teams 17-18, 32-38, 71
Liabilities 92 types 2-13
Lindselt (1818) case 69 see also individual organisations
Liquidation 43 Output, contracts 56
Location, of organisations 11-13 Outsource, contracts 94
Ltd see private limited companies
Lump-sum pricing 57-58, 62, 78, 112, 114-116, p
123
Panel contracts 52
Partners 3
Partnerships 4-5
Partridge v. Crittenden (1968) 68
Malaysia Mining Corporation Bhd (1989) case 66
Patented/patents 1O
Manufacturing 9-1 O
Payment terms 108
Market publications 97-98
People in organisations 14-20
Marketing 35, 37
Percentage fees 60
Maslow's Hierarchy of Needs 14-15
Performance specifications 74-75
Material requirements planning (MRP) 99-100, 102
Petty cash 102
Measurable, SMART criteria 22-23
Pitch 64
Mendelow's theory 19-20
Pie see public limited companies
Minimum order quantity (MOQ) 99
POA see price on application
Mission statements 21-22
Political factors 23
Motivation aspects 14-17
Portalsites 102-119
MRP see material requirements planning
Pre-qualification questionnaires (PQQ) 109
Multi-national organisations 4
Pre-qualify/qualification 108-109
Multilingual search engines 83
Price on application (POA) 88
Price lists 106
Pricing
Not-for-profit organisations 6 advantages/disadvantages 112-126
contracts 50, 53-65, 78-79
database information 108
framework arrangements 50
Objectives in organisations 20-25
goods/services 111-126
Obligations 76
schedule appendix 78
Officers, definitions 94
Private limited companies (Ltd) 5
Open tendering 70
Private sector organisations 4-7
Operating functions 30-44
Process improvement techniques 104
Operation procedures 13-30
Procurement
Operations departments 35-37
contract awards 41-42
Order histories 106
differentiating from supply 38-43
Ordering processes 104, 106
information sources 98-11 O
Organisations
organisation functions 35-37
culture 24-25, 27-28
151
Produce, information sources 103 Schedule of rates 58-59, 78, 112, 116-118, 123
Production departments 35-37 Schedules, contracts 78
Production organisations 7-13 Scores, credit rating 90-94, 97- 98
Profit and loss statements 91-92, 96-97 Search engines 82-87
Profits 20-23 Sector types 2-13
Prospective suppliers 73 Sending purchase orders 100- 101
Public limited companies (Pie) 5 Service organisations 7- 8, 10- 13
Public sector organisations 2-4, 7 Services
Publications, information sources 93-98 contracts 1 5, 20, 65-79
Purchase ordering systems 99-102 pricing 111 -1 26
Purchases publ ic sector 2
contracts 15, 20, 65-79 Set terms 39
pricing 111-126 Shareholders 5
Pyramid structures 27 Shipping, information sources 104-106
Shop floor 1O
Q SMART criteria 22-24
Social factors 23, 84- 85, 108
Qualitative, definitions 75
Soft skills 24
Qualitative key performance indicators 75-76
Sole traders 4
Quality Control 10, 36
Specific, SMART criteria 22- 23
Quality of goods/services 50-51
Specifications
Quantitative, definitions 75
contracts 74-75
Quantitative key performance indicators 75-76
procurement 39
Quantity of goods/services 50-51
Spot purchases 46- 49
Quotations 70, 72- 73, 106
Staged pricing 57
Stakeholders 3, 18-20
R Standard contracts 47
R&D see research and development Standard terms 47
Ratings Standards 104, 108
credit ratings 90-98, 108 STEEPLE framework 23
supplier database systems 107 Stock markets 5
Read receipt 100 Storing purchase orders 100-101
Rebates 108 Strategic, definitions 38
Recruitment 34 Structures, organisational 26-33, 103
Reimbursable pricing 59-61 , 78, 112, 118-119, Suppliers
124 credit rating agencies 90-98
Rejection, contracts 69 database systems 107- 109
Relevant, SMART criteria 22-23 evaluation/ research 40-41
Request for quotation (RFQ) 41, 72-73 handbooks 104
Requisitions 39 information sources 81-110
Research and development (R&D) 36-37 Internet 82-90
Researching suppliers 40-41, 84-87 portal sites 102-119
Response evaluations 41-42 search engines 82-87
Restrictive tendering 70 websites 87-88
Return on investment 21 Supply
Revenue, definitions 91 contracts 15, 20, 65-79
Revocations 69 differentiating from procurement 38-44
RFQ see request for quotation system information sources 98- 110
Risk-and-reward-pricing 63- 64, 78, 112, 121-122, Supply chains 42-44
125 Survival 15, 20
Role of credit rating agencies/scores 90-93 Sustainability 84-85
Roscorla v. Thomas (1842) 67
T
s Tall structures 27-28
Sales 36-37 Tangible items 8
Samples 41 Target audiences 88
152
Target-pricing 62-63, 112, 120-121, 124-125 TSO see third sector organisations
Teams, organisations 17-18, 32-38, 71 Tuckman's team development 18
Technology, STEEPLE framework 23 Turnover 92
Tendering, contracts 70-73 ll
Term contracts 48-49
Unconditional acceptance 68
Termination, contracts 69-70
Terms
contracts 76-78
spot purchases 47 Variable costs 56
Testimonials 86 Variable-pricing 61-62, 78, 112, 119-120, 124
Third sector organisations (TSO) 6-7 Vision statements 21-22
Thornas(1842)case 67
Time aspects
contracts 69
Web-based portal sites 102-119
SMART criteria 22-23
Websites 87-88
Trading history 108
Win-win matrices 55
Traffic, websites 88
153

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Copyright© CIPS 2018. All rights reserved

All facts are correct at time of publication.

Author: Katie Jarvis-Grove FCIPS Chartered Procurement and Supply Professional

First published in 2018 by CIPS

Editorial and project management by Haremi Ltd.

Guide to qualification content vi

About our exams and your study commitments vii

How to use this book viii

Procurement and Supply Operations x

Types of organisations and how they operate 1

Identify the types of business organisations 2

Describe how organisations operate 13

The components of contractual agreements 45

Identify types of contracts 46

Identify the kind of pricing arrangements applied in commercial contracts 53

0 Sources of information on suppliers and customers 81

Explain the use of credit rating agencies 90

Describe systems used in procurement and supply 98

e Pricing methods used for the purchasing of goods or services 111

Explain the advantages and disadvantages of a range of pricing methods 112

Enf:rylevei Entry !eve! Nighest Entry level

--- ------------" - ---------- -- --- - - - - --------------- - I

Advanced Certificate in Procurement and Operations,

Based on the Tactical competency level of CJPS Global Standard

CORE Procurement and • CORE Stakeholder · •

What will I learn?

Total credits required for completion 18

Objective Response exam format (OR)

Your total qualification time (TQT)

The TQT indicates the overall number of guided learning hours,

Guided learning hours (GLH)

Self-study requirement (SSR)

Additional!y, we recommend that you also commit to at least [54 SSR]

Total exam time

All the modules in CIPS qualifications are assessed by an examination.

How to use this book

Learning After completing this chapter you will know the

Learning By the end of this chapter, you will know the

Learning After completing this chapter you will understand

After completing this chapter you w ill understa nd

information is important, so you should make a note of it.

These are the key

These case studies will relate the content you have

Link to CIPS knowledge where members will be

End of chapter assessments

End of Chapter Assessment

After completing this chapter you will know the

f) ldenti~ t~e types of business

Public, private and third sector

Public sector organisations

Table 1. 1 Public sector services

So how do public sector organisations get their money? Governments charge

Schools, colleges, Community

Figure 1.1 Stakeholders in the public sector (Source: www.publicengagement.ac.uk)

Third sector organisations

Table 1.2 TSO values and characteristics

Differences between the three sectors

Owned by Government Private investors Public

Table 1.3 Differences between sectors

Organisations always supply something to someone. They are responding to a need

Considerations of a production organisation