CIPS L2M1.

1:
Introduction

Lec 1

By: Almahi Suliman

Procurement Expert
Module Aim:
On completion of the module, learners will
be able to identify the fundamental roles
and activities, the systems, procedures,
processes and contracts associated with
the procurement and supply function.
Purpose
• In any organisation, many of the costs are related to
the purchases of products and/or services. Any
organisation will also be supplying products and/or
services to their customers. This module is designed to
provide an overview of the tasks associated with the
procurement and supply chain function.
• It is designed for those who are interested in
developing their knowledge of procurement and
supply and for those who are new to this field of work.
• The module serves as the initial study for learners who
are embarking on the CIPS Level 2 Certificate in
Procurement and Supply Operations. Coverage is
focused on introductions to concepts and ideas as well
as to the terminology used in procurement and supply.
Chapter 1: the role of procurement and
supply within organisations - Learning
outcome:
• By the end of this chapter, you will understand:
• The role of procurement and supply within
organisations,
• The role and benefits of procurement and supply,
• The different components of a supply chain, and
global aspects of supply chains.
Learning Outcome 1: Understand the role of
procurement and supply within organisations
1.1 Identify the common terms that describe aspects of procurement and supply
• Definitions of common terms such as procurement, purchasing, buying, supply chain, materials management,
distribution, logistics and contract management
• Definitions of different types of procurements such as capital and revenue purchases, products, services, direct and
indirect, outsourcing and insourcing
• Three sectors of activity: extraction of raw materials (primary), manufacturing (secondary), and services (tertiary)
1.2 Explain the roles and benefits of procurement and supply in organisations
• The typical proportion of costs accounted for by procurement of goods and services
• The roles of procurement and supply and procurement professionals
• Achieving value for money
• Sustainability in procurement and supply
• The roles of staff with devolved responsibilities for procurement of goods and services
• The roles of procurement and supply staff in making expenditures with suppliers
• The tiers of a supply chain
1.3 Define components of a supply chain and their customers
• Suppliers and their use of suppliers, customers and consumers and the tiers of a supply chain
• The global aspects of supply chains, and examples of supply chains in action
Introduction:
• Procurement and supply are key functions in organisations, because all
organisations need to demonstrate effective procurement in order to be cost
effective. The more cost effective and organisation is, the more successful it is
likely to be.
• This chapter explains the role of procurement and supply within organisations. It
explains the common terms used in procurement and supply, the different types
of procurement and how procurement operates in different sectors of the
economy.
• The role and benefits of procurement and supply in organisations are then
discussed, and the chapter concludes by defining the components and functions
of a supply chain – a central concept in procurement.

6
1.1 Identify the common terms that describe
aspects of procurement and supply
• Definitions of common terms such as procurement,
purchasing, buying, supply chain, materials management,
distribution, logistics and contract management
• Definitions of different types of procurements such as
capital and revenue purchases, products, services, direct
and indirect, outsourcing and insourcing
• Three sectors of activity: extraction of raw materials
(primary), manufacturing (secondary), and services
(tertiary)
Common terms that describe aspect of
procurement and supply
• In this section, we define the most common terms relating to
the field of procurement and supply: procurement,
purchasing, buying, supply chain materials management,
contract management, distribution and logistics. Some of
these terms are used interchangeably in practice, but it is
important to know the correct definitions and understand
the differences between related terms. This knowledge is
essential to have a full understanding of what is required
within the profession.

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Procurement:
• Procurement is the act of obtaining something, • Procurement: The act of obtaining
whether it is tangible or intangible – for example, a something, whether tangible or
product or a service. Procurement describes the entire intangible, such as a product or
process from identifying the need to the delivery of service.
the goods or service. effective procurement is about
obtaining goods or services for the best value for • Tangible: Something you can physical
money. There are many roles associated with this see or touch
process, which are explained further below. • Intangible: Something you cannot
• Procurement is a strategic function of business and physically see or touch
requires a high level of skills. • Strategic: High-level planning, usually
• Procurement covers all the practices and strategies related to long-term goals.
that are required to ensure that an organisation has a
continuous flow of materials and services to meet its • Consumer: Any individual or
needs. It has a strategic and long-term focus. With the organisation who pays an amount to
aim being to create value in the organisation. consume goods or services
Procurement does the following:
• Identifies the materials and services that need to be • Customer: The person who
purchased purchases and pays for (but
does not necessarily use) a
• Select the best suppliers in the market product or service
• Helps to generate effective development of new • Requestion: Paper or
products electronic document stating a
• Protects the organisation's cost structures and need for procurement to
maintains the correct quality/value balance supply a product or service
• Monitors supply market trends • Specification: A detailed
description of what is
• Negotiates effectively in order to work with suppliers required
who will seed mutual benefit through economically • Lead time: The lapse of time
superior performance. between placing an order
• Adopts environmentally responsible supply with a supplier and receipt of
management. the goods
(1.1) The procurement and supply cycle

Figure 1.1 The main processes that take place during procurement
Identify the need
• The procurement function in an organisation
reacts to a need that is generated from the end
user, who is a consumer or a customer. A
requisition would be raised, either in paper form
or electronically, and given to the procurement
team to action once it was authorized.
Develop the specification and set terms:
• Although a need has been identified, it does not
mean that the procurement function is a ware of
the specification of what is needed. Several
things need to be looked at before a
specification can be drawn up and sent to
potential suppliers. A specification might contain
information such as that detailed in table 1.1:
The information that goes into specifications:
Description What the product called and its unique part code
drawing The drawings shows the exact size, dimensions, material and weight
colour If there is a specific colour required or a brand match, this will be detailed and
may also feature on the drawing
packaging Details of type of packaging as well as how goods are to be packed
delivery Also known as lead time. Is the supplier to quote for transport or provide a
collected price?
quality What quality specifications have to be achieved? ISO9001 standard

There are two types of specification: a performance (or outcome-focused) specification

explains what the product or service is to achieve, whereas a conformance specifications
state exactly how the product or service is to be made or provided.
Research and evaluate the suppliers:
• Once a procurement function is aware of the specification of
what it needs to buy to fulfil the need of the customer, it can
start to research suppliers that can make or supply the
goods. Research can carried out by various means:
• On the internet
• Through existing relationships
• At trade shows
• Evaluating suppliers before sending out the enquiry means looking
into a wide range of factors.
Table 1.2 illustrates the factors that procurement
functions need to evaluate. Key questions to ask in
supplier evaluation
Capacity Could the supplier cope with the order?

Environmental Does the supplier cause lots of pollution?

policies Do they dispose of their waste correctly?
Financial stability How much debt does the supplier have? Is it
affordable? What is their credit rating?
Location Can the supplier manager the logistics of delivering
the goods?
Reputation Does the supplier have a good reputation?
Send out an RFQ or ITT
• Once the suppliers have been researched Request for Quotation
and evaluated, request for quotation (RFQ)
(RFQ) or Invitation to tender (ITT) • An invitation to
documents can be prepared and sent out. suppliers to bid on
specific products or
These documents must contain all the services
information from specification. This
Invitation to tender (ITT)
means that the possible suppliers have all
the details they need to be able to send a • Document inviting
quote back. potential suppliers to
quote for business.
Evaluate responses and award contract:
• Once all the RFQ or ITT responses have been received they need
to be evaluated.
• When the evaluation process has been completed, it can be
decided which supplier would be best to carry out the contract.
• When the decision has been made, the procurement function
can negotiate terms and then award the contract to the supplier
• Once the contract has been signed and is in force, it is important
that the procurement function manager the contract. Suppliers
need to be spoken to, feedback given and any issues that may
arise need to be dealt with quickly.
Purchasing:
• Purchasing is part of procurement and includes all the activities that are needed to do
the following:
• Define the specifications of the products and/or services that need to be purchased
• Select the best suppliers possible
Purchasing:
• Negotiate with the suppliers
The processes concerned
• Agree the terms and the appropriate contract type with acquiring goods and
• Place an order services, including payment
• Control and execute an order of invoices – it is part of the
• Follow up an order wider procurement process.
• Evaluate the process and the supplier
• Purchasing is about the operational and tactical aspects that are needed to buy materials
and services and it is part of the procurement process. Procurement has a long-term
focus, which includes the shorter-term activities that contribute towards creating value
in the long term.
Buying
Buying:
•In the context of
• The physical act of
procurement, buying is the placing orders to make a
physical act of placing the purchase
order to make a purchase.
The research prior to the • Remember:
buying activity may already • Procurement and
purchasing are not the
have been carried out. same.
Supply Chain
• Supply is a very important area within procurement
• Supply is the act of physically getting something from the supplier to the
customer, and it often involves many organisations. All aspects of supply 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 materials stage, through to the end user, as well as the
associated information flow.
• The supply chain involves a network of individuals, organisations, technology,
activities and resources to make sure goods or services flow through the chain. If
one part of the chain fails, every organization further down the chain also fails.
Materials management
• Materials management is part of procurement and involves
making sure that organisations such as manufacturers always
have the materials management is linked to the supply
chain, as this process is integral to getting what is needed
from its raw form to the factory.
• Materials management also involves inventory and
warehousing, which are functions linked to storing products
in a cost effective and safe manner.
Distribution
• Distribution refers to the process of moving materials or products from one supply chain
participant to another.
• Distribution is part of procurement and the process requires management by both the
buying organisation and the supplying organisation.
• The suppliers to an organisation have to make sure that the goods they are supplying are
distributed on time and in full and arrive safely with the buyer.
• Buyers can check on the progress of their order by expediting the order. Expeditors
check the orders have received by the supplier, review order acknowledgements and
progress the order to make sure everything will arrive on time, while monitoring any
possible problems.
• Distribution can also related to finished goods leaving a buyer’s organisation. Staff are
often employed to run the distribution function, which can involve planning routes,
managing drivers and arranging loading and return loads on vehicles.
Logistics
• Logistics is the process of planning, implementing and controlling procedures for
the efficient and effective transportation and storage of goods, including services
and related information, from the point of origin to the point of consumption for
the purpose of conforming to customer requirements. Council of supply chain
management professionals (CSCMP), 2013
• Distribution is part of logistics, which in turn is part of procurement
• Logistics is the control of the flow of goods or services between two points. It is
about making sure that people or things are where they need to be when they
need to be there
• Logistics includes handling, packaging, inventory, warehousing and
transportation.
Contract Management
• Buyers are often responsible for managing the contracts that have
created. This includes:
• Monitoring supplier performance
• Monitoring quality
• Monitoring prices
• Contract management includes holding meetings with suppliers to
gain regular feedback and address any potential issues before they
become a problem
• Managing suppliers correctly is an important part of procurement and
is a key part of risk management and achieving value for money over
the life of the contract.
Different types of suppliers
require different styles of
management. According to
Kraljic, suppliers fall into one of
four segments based on how
much they cost and how much
risk they expose an organisation
to.
The level of contract
management and interaction
between a buyer and a supplier
depends on where they sit in
the matrix
Apply:
• Write a short statement explaining what each area within the
procurement and supply field is responsible for:
• Procurement
• Purchasing
• Buying
• Supply chain
• Materials management
• Distribution
• Logistics
• Contract management
Different types of procurements
• Procurement can be further broken down into the following
categories if goods or services.
• Capital and revenue purchases
• Products
• Services
• Direct and indirect
• Outsourcing
• Insourcing
• These categories are discussed in the next slides.
Capital and revenue purchases
• A capital or revenue purchase is the procurement of something
of value to a business. These are products whose purchases value
depreciates during their lifetime. This category of products is not
used immediately.
• Some examples of capital equipment are the machines and
buildings that a company will buy to produce its products and
services. Capital purchases become assets to a business
• Capital purchase are often funded through finance such as bank
loans.
Products
• Products are anything tangible that a buyer purchase. Within
procurement the range of products is vast. Products can be
anything from office stationery, to components in a factory,
to buildings.
• Despite the range of things a procurement professional can
be expected to buy, much of the theory is the same
whatever the product. Once learned and understood, it can
be applied to most situations.
Services
• Service are intangible. Procurement professionals
have to buy things that they can not physically touch
or see, as well as tangible items. As with tangible
products, there are many different services that the
procurement function may be called on to buy,
ranging from one-off requirements such as car
valeting, to an energy contract that could extend for
many years.
Direct and indirect procurements
• Procurement can be split into two subsidiaries: direct or indirect Remember:
procurement.
• Direct procurement relates to spend or activity in acquiring raw
materials or components used to create a product for an external Fixed costs do
customer or client. not change over
• An example of this could be in purchasing paper for the production a set period of
of a book. Any issues here can affect the company’s ability to
create their product to sell. time. Varuiable
• Indirect procurement relates to business spend on goods or costs do change
services that are needed for its day-to-day running. This could be over a set period
maintenance costs or goods for internal stakeholder consumption, of time
such as company laptops or utility bills.
 Outsourcing
• Outsourcing is the process of contracting
an organisation outside of the business to
carry out a service
• Within organisations costs can often by
reduced by assessing whether products or
services should be produced in-house or
outsource.
• The Outsource Matrix:
• To help decide whether a product or service
should be outsourced a basic matrix can be
used
• Processes or services within organisations are
placed in one of the four quadrants in the
Outsource Matrix.
Quadrant 1 – strategic alliance, Quadrant 2 – retain
& Quadrant 3- eliminate
• Quadrant 1 – strategic alliance
• A process that has a high strategic importance and a low contribution to the operational
performance.
• This process can be bought, but should be contracted to a supplier in which there is a high
level of trust.
• Quadrant 2 – retain
• A process that has a high strategic importance and a high contribution to operation
performance.
• This process should be kept within an organisation where full control remains.
• Quadrant 3- eliminate
• A process that is neither high in strategic value nor contributes to operational performance.
• This process is not required within the organisation so can be eliminated.
Quadrant 4 – Outsource
• A process that has a high contribution to operational performance
but low strategic importance
• This process is suitable for outsourcing.
• The matrix suggests that two questions should b asked about a
process within an organisation before the decision to outsource is
made.
• The two questions are as follows:
• Does the process give the organisation a competitive advantage? This is
related to the strategic importance of the process.
• Does the process contribute to the smooth operating of the organisation?
This is related to the operational importance of the process.
Quadrant 4 – Outsource
• Organisations often outsource services within their business
that are not critical to the organisation or of great strategic
importance, but are needed nevertheless. Here, outsourcing
can often save an organisation time and money.
• Typical processes or services that organisations frequently
outsource include the following:
1. Catering 2. IT support
3. Cleaning 4. Social media
Insourcing
• Insourcing is the exact opposite of outsourcing.
Where outsourcing is contracting an outside
organisation to carry out a process or service,
insourcing is where the organisation undertakes
its own processes or services.
• When a process has been outsourced and is
resumed in-house, this is also referred to as
insourcing.
Case study: Jasmine’s Jigsaws sorts its buying
• Jasmine’s Jigsaws is a medium-sized business that makes and distributes
personalized jigsaws. Clients send in their photographs and the company creates
a jigsaw from the image.
• Jasmine’s Jigsaws has been growing organically for several years and the CEO has
decided it is time to employ a skilled buyer.
• Shan started work at the organisation as a buyer, and after his induction was
given time to look around the business and its systems to get an understanding of
what their procurement function looked like.
• Shan knew that once he had categorized the spend, he would have a clear view
on whether the company was getting value for money and what he could do to
make things function more efficiently.
Apply
• Read the Jasmine’s Jigsaws case study, then
read the list of spends Shan discovered on
his first day. Divide these spends into the
following categories: products services,
direct indirect, capital purchases,
outsourced:
• Baler machine
• Cleaning contract carried out by outside
company
• Electricity
• Glue for making jigsaws
• Haulage for delivering orders carried out
by own vehicles hourly wages
• Hourly wages
• Mobile telephone contract
• Packaging for jigsaws
• Printing machines
• Rent for factory
• Salaries
• Stationery for office use
• Waste collection service
• Wood for making jigsaws
Sectors of the economy
• The economy is divided into three sectors • Economy
of activity.
• The state of money flow,
• The three sectors represent the various
types of goods or services that they manufacturing,
produce and sell distribution, availability
and consumption, or
• These sectors are listed below and are all
linked together to meet a common need scarcity, of goods and
of the end consumer. services, energy, labour,
• Primary or other resources at
• Secondary country level
• Tertiary

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1.1: The three business sectors

Figure 1.4 The three sectors of the economy

Slide 4
Primary sector
• The primary sector is concerned with acquiring raw
materials. this include extracting materials from the earth:
mining coal, drilling for oil and removing metal ore from the
ground are primary sector activities. Other primary sector
activities include farming crops or trawling the ocean for fish.
• Primary sector is the first stage of the production and
manufacturing process – e.g. farming and the extraction of
raw materials
Secondary sector
• The secondary sector is involved in manufacturing and assembly. The
industries in this sector convert raw materials into finished products.
The oil that was drilled for by the primary sector can be converted
into plastic in the secondary sector, and the farm crops can be
processed into food products. The secondary sector does not just
change products but also assembles them. For example, the materials
acquired by the primary sector.
• Secondary sector the second stage of the production and
manufacturing process – e.g., manufacturing industries
Tertiary sectors
• The tertiary sector is the service industry – the businesses that support the production
and distribution processes. Tertiary activity includes transport, storage and intangible
services such as insurance or health care.
• The three sectors of activity work together to form a chain, and each sector adds value to
the process. The primary sector gathers the raw materials to manufacture or assemble a
product. The tertiary sector is key in supporting the primary and secondary sectors.
• All individuals’ jobs fit into one of the three sectors.
• Some types of businesses are linked solely to one sector, such as mining, and some
businesses are lined to all three
• A vineyard that grows grapes, then makes wine and then sells it in the farm shop is an
example of a businesses that has all three sectors included in its organisation.
Warburton's Bread: adding value
• Thomas Warburton and his wife Ellen first opened their grocery shop in 1870, but
it wasn’t until 1976, during a slump in the grocery market, that Ellen Warburton
started baking bread. Within two weeks the tiny shop in Bolton was renamed
“Warburton's the bakers’ and continued to go from strength to strength over the
next 141 years.
• Warburton’s is still a private family-owned business, actively managed by the fifth
generation of Warburton's: Jonathan, Ross and Brett. It is the largest family-
owned baker business in the UK, and employs around 4500 people across 12
bakeries and 14 depots
• The first sector of industry is the primary sector. This is concerned with natural
resources and the extraction of raw materials. For Warburton’s, this means
working with farmers who grow the grain that is required to make its bread and
bakery products.
Warburton's Bread: adding value
• The next sector of industry is the secondary sector. This involves the
manufacture or refining of goods from the raw materials obtained in
the primary sector.
• The millers who turn the grain into flour belong to this sector, as do
the activities of the Warburton’s organisation as it uses science and
technology to create the products consumers want.
• The third sector is called the tertiary sector, and this is where services
are provided to business and consumers. The distribution of
Warburton's products falls into this sector, as do the services
provided retailers by the organisation
Warburton's Bread: adding value
• The chain of production sees a product move through the three sectors of industry. There are a
number of different stages in the chain of production. The system starts with the raw materials and
may involve one or more manufacturing processes. It then finishes with final products that are ready
for consumers/
• During each of the different stages, value is added to the product. Value is added in a number of ways.
Here are some examples:
• Converting wheat into finished baked goods
• Packaging baked goods in a way that keeps them fresh
• Delivering them to places that are convenient for the consumers to purchase from
• Using sustainable methods and materials
• Having the trusted Warburton's premium brand name
• Although Warburton's core activities fit in the secondary sector, more emphasis has been placed on
adding value through service – the tertiary sector.
• (source: www.warbutons.co.uk)
We have talked about the following topics:
We have identified the common terms that describe aspects of
procurement and supply
• We have defined the common terms such as procurement,
purchasing, buying, supply chain, materials management,
distribution, logistics and contract management
• We have defined of different types of procurements such as capital
and revenue purchases, products, services, direct and indirect,
outsourcing and insourcing
• We have discussed the three sectors of activity: extraction of raw
materials (primary), manufacturing (secondary), and services
(tertiary)
Check your understanding
Q1. Which of the following is a definition of the term ‘supply chain’?
a. The way in which information passes from user to procurement supplier
b. The range of suppliers used by a procurement organisation
c. The network of organisations and activities involved with the flow and
transformation of goods
d. The types, frequency and organisation of deliveries to the end user
Q2. A primary aim of a procurement professional must be to achieve …

a. value for money

b. stock control
c. inventory management
d. outsourcing
 Thank you for
you attention
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