Purchasing contexts

Session 1 Understanding organisations Formation and regulation of the Private Sector

Learning objectives
At the end of this session candidates will be able to: describe the different sources of ownership, control and regulation of organisations in all sectors compare the financial structure and governance of different types of organisation contrast the business objectives of organisations across different sectors compare and contrast the different forms of private sector organisation describe how private sector companies are formed and financed use appropriate examples to describe how the activities of the private sector are regulated and the impact this has on purchasing describe how private sector enterprises are terminated and the impact of this in the wider business environment evaluate the impact of the 'profit motive' on the purchasing function.

Organisations
Organisations are networks of related parts, the state of being organised or the differentiation of parts and functions integrated into into a systematic interconnected whole (Penguin English Dictionary) Formal organisation Informal organisations Virtual organisations.

Formal organisations
Public Sector Includes government departments and local authorities Focus on serving the public as ordered by government Private Sector Includes plc, partnerships, sole traders and charities Focus on profit, customer needs and continuous improvement Accountable to organisation for spending, monies raised from financial stakeholders.

Money comes from funds raised by government from corporate and individual tax payer.

Not-for-profit organisations
Set up to meet specific object, not driven by profit motive Relies on donations, grants and sales of own goods, for example, Oxfam May be owned by members or a charitable trust Managed by board of directors or trustees.

Working with others

SENIOR MANAGERS EXTERNAL AGENCIES OTHER FUNCTIONS

CUSTOMERS

Purchasing

OTHER FUNCTIONS

OTHER STAKEHOLDERS

OTHER FUNCTIONS THE PURCHASING TEAM

Governance
Legislation legal framework within which organisations must act, for example Employment law Regulations operating conditions or regulations to which organisations must comply, for example, HSE (Health and Safety Executive), licence to operate.

Objectives
Strategic objectives To provide overall purpose and direction (long-term)

Operational objectives To provide teams and individuals with a framework for day-to-day decision making (shorter term)

Private sector
Unincorporated - sole traders and partnerships with owners responsible to themselves Incorporated Private Limited Company (Ltd.) and Public Limited Company (plc) owned by shareholders with limited liability for the company.

Sole traders
Simple to set up by owners who inform the tax office and complete accounts for HM Revenue and Customs each year Owners responsible for financing, so rely on loans from banks and other financial institutions.

Partnerships
Set up through Deed of Partnership or Partnership Agreement which sets out capital each partner invests, profit sharing, salary distribution and how liability/losses will be shared Responsible for own finance but has potential for greater borrowing than sole trader.

Limited liability companies

Companies Act 1985 requires listing on Register of Companies at Company House and submission of annual accounts To form a company requires submission of Memorandum of Association and Articles of Association Financed by shareholders and borrowings from financial institutions Public limited companies can raise funds by selling shares and spreading ownership but private limited companies are not able to offer shares to the public.

Stakeholders
All types of customers People of the organisation Shareholders Financial supporters Local community Potential employees Media Suppliers Distributors.

Private Sector regulation

In the private sector regulation exists to protect the interests of: consumers domestic market national economy public welfare. What regulatory bodies are you aware of? What are the responsibilities of industry regulators?

Private Sector closures

Reasons for companies ceasing to operate are usually: Strategic owners may try to sell it to new operators Financial cannot pay its way so usually closed by means of a winding-up order What are the potential impacts on stakeholders of the closure of a company?

Purchasing contexts
Session 2 Types of Private Sector organisation Types of Public Sector organisation

Learning objectives
At the end of this session candidates will be able to: compare and contrast the classification of market sectors describe the characteristics of companies in a range of market sectors identify key market influences and their impact upon the purchasing function compare different types of public sector organisation and their inter-relationships describe the role of regulation and its impact on purchasing activities appraise the objectives of a public sector organisation analyse the multiple forms of stakeholder in the public sector and their impact on purchasing activities.

Market sector classification

Size for example, SME less than 250 employees and 50 million turnover Business activity Extractive raw material (primary), Manufacturing (secondary) and tertiary sector, including energy and service industries Ownership and control for example partnerships and companies.

Key market sectors

Manufacturing Engineering Retail FMCG (Fast Moving Consumer Goods) Technology Services

Consumer products supply chain

Producer Agents or Brokers Wholesalers Retailers Consumers

Industrial products supply chain

Producer

Agents

Industrial Distributors Industrial DMUs

Supply chain example

Raw materials producer Sub-component manufacturer Component manufacturer Primary manufacturer Car dealership Targeted consumer (purchases car).

Manufacturing operations
Amongst other factors, efficiency and effectiveness depend on accurate forecasting of demand and production planning and efficient quality and stock control Examples Jaguar, Thorn EMI and Crown Paints How do you think the key market influences impact on purchasing?

Engineering
Different types of engineer civil, mechanical, design, process, software Industry dependent on intellectual capital Three main applications new build, renewals, maintenance How do you think the key market influences impact on purchasing?

Retail
Sell products made by others goods for resale Examples include supermarkets, DIY stores and chemists EPOS (electronic point of sale) systems provide retailers with information on the buying habits of customers so they can stock what sells well How do you think the key market influences impact on purchasing?

FMCG
Examples include confectionery, toiletries and soft drinks aimed at the mass market Need to reflect changing consumer needs so agility in the supply chain is important Many products are branded and sellers require volume sales for viability hence the name! How do you think the key market influences impact on purchasing?

Technology
Main market segments are hardware, software, telecommunications and services Examples include IBM, Dell, Intel and Microsoft Rapidly expanding industry which relies heavily on intellectual capital and research and development How do you think the key market influences impact on purchasing?

Service characteristics
Intangible
Cannot be stored, displayed or protected through patents. Pricing and promotion can be difficult Cannot be stockpiled consumers have temporary ownership Consumer involved in production. Centralised mass production difficult Lack standardisation, difficult to control quality.

Perishable

Inseparable Heterogeneous

Services
Quality is measured through considering tangibles, reliability, responsiveness, assurance, empathy Two dimensions of service are people and process How do you think the key market influences impact on purchasing?

Public Sector organisations

Central Government Local Government Government Agency Health Authority Armed Forces Utility Organisations How do the aims and objectives of these organisations differ from those in the private sector?

Public Sector regulation

Examples include Ofwat and Oftel Similar duties to private sector but additional focus on:
Reviewing company accounts Monitoring profit level Setting price tariffs Ensuring competitive markets

Public Procurement Directives

The EU Procurement Directives set out the legal framework for public procurement They apply when public authorities and utilities seek to acquire goods, services, civil engineering or building works They set out procedures which must be followed before awarding a contract when its value exceeds set thresholds.

EU Procurement best practice

Clear objectives Clear specification Knowledge and understanding of market and law Effective sourcing with all suppliers treated equally Sound, objective criteria for contract award Efficient contract management Strict monitoring of supplier performance.

Stakeholder management
Similar to private sector companies, public sector companies have to meet the needs of their stakeholders A stakeholder is anyone who has an interest in the organisation and include individuals, groups and other organisations Consider a public sector organisation such as a Hospital Trust, who would you list as their stakeholders?

Purchasing contexts
Session 3 The Third Sector (voluntary and not-for-profit sectors) Funding perspectives for purchasing

Learning objectives
At the end of this session candidates will be able to: describe the defining characteristics of the Third Sector (voluntary and not-for-profit organisations) explain with examples how these organisations are regulated and how this influences purchasing decisions identify the principal strategic objectives of not-for-profit organisations and analyse their impact on purchasing activities evaluate the importance of CSR for notfor-profit and voluntary organisations

Learning objectives (contd)

describe a simple budgeting process for regular goods and services describe how investment expenditure is requested and appraised in organisations compare and contrast public and private funding initiatives analyse the impact of economic factors such as inflation, interest and monetary exchange rates.

Third Sector organisations

Example: Objectives: Charity To serve the needs and wants of clients and donors

Financial contributions, time and support

CHARITY

DONOR

Satisfaction from solving social problems or promoting awareness of issues

Who would you list as stakeholders?

Management
Operate under a constitution which defines objectives, rules and regulations, financial activities and codes of conduct for members and so on Often a company limited by guarantee to protect the liability of members.

Regulation of the Third Sector (not-for-profit and voluntary organisations)

Charity Commission is the registrar and regulator of not-for-profit and voluntary organisations Ensure compliance with charity law, promote governance, sound practice and accountability.

Objectives of Third Sector (notfor-profit and voluntary organisations)

To promote and develop for the public benefit the art and science of purchasing and supply and to encourage the promotion and development of improved methods of purchasing and supply in all organisations To promote and maintain for the benefit of the public high standards of professional skill, ability and integrity among all those engaged in purchasing and supply To educate persons engaged in the practice of purchasing and supply and by means of examination and other methods of assessment to test the skill and knowledge of persons desiring to enter the Institute CIPS

Corporate Social Responsibility (CSR)

Broadly accepted concept to describe a collection of related issues all of which combine to describe an organisations overall ethos, personality, philosophy and character Included are environmental responsibility, diversity and supplier diversity, ethics and ethical trading and impact on society What examples have you within your organisation, or ones that you know well, of the impact of CSR on purchasing activities?

Corporate Social Responsibility (CSR)

Drivers to improve CSR within purchasing are varied and include: customers and other stakeholders public opinion or media employees or trade unions.

Budget cycle
Budget request Review against objectives Budget allocation Measurement and monitoring of spend Interim review Final review and reconciliation
How should purchasing inform this process?

Investment expenditure
Expenditure on capital assets Strategic decisions, so require a business case for purchase to show ROI (Return on Investment) Feasibility study includes consultation and research, identification of tangible and intangible benefits and a benefits-cost analysis (BCA).

Benefit/cost ratio
(Taken from the workbook by Ian Thompson)
Benefit/cost ratio: Less than 1 What it means: The cost of investment outweighs the tangible benefits from the project. There is no immediate financial justification for the investment. Most projects are unlikely to proceed. The cost of investment is exactly the same as the tangible benefits from the project. There is no real financial justification for the investment, although there may be additional contributory factors from intangible benefits. Some, but certainly not all, projects may proceed. The benefits of the project outweigh the costs of investment and there is financial justification for undertaking the project. Most projects will proceed, providing the investment offers sufficient ROI. Some private sector enterprises require the Benefit/Cost ratio to exceed 3 before the investment is justified.

Exactly 1

More than 1

PPP Schemes
www.partnershipsuk.org.uk Partnerships UK Design-build joint venture Operation and maintenance Build-Own-Operate-Transfer (BOOT) Turnkey operation Private Finance Initiatives (PFI) is a government initiative whereby the private sector designs, builds, finances and operates the facility and the public sector organisations uses it under a pay as you go arrangement widely used in the NHS

Economic factors
Value of money is determined by its purchasing power! A rise in the general level of prices, so that there is a decline in the value of money, is a situation of inflation, deflation being the opposite One of the best measures of inflation is the Retail Price Index (RPI) - base for the index was 13 January 1987 = 100.

Economic factors
Rate of interest is relevant to investment if a capital project were to yield 8 per cent and the rate of interest was 11 per cent investors would not be interested, however, if it was the other way round they might be tempted! Exchange rate is the result of the interaction of export demand and import supply a high exchange rate = strong pound.

Economic factors
Prices fluctuate continually due to many factors which often interact and impact on each other What factors can you list that might lead to an increase or a decrease in prices? How can purchasing professionals ensure that they get goods and services at the best price?

Purchasing contexts

Session 4 The purchasing organisation Supply markets and supply chains

Learning objectives
At the end of this session candidates will be able to: compare and contrast a range of functional models for purchasing describe the typical roles and responsibilities within a purchasing function appraise the relative merits of the 'parttime' purchaser evaluate the merits of centralised vs. decentralised purchasing structures identify the purchasing function's key customers and describe the role of purchasing as an internal service provider

Learning objectives (contd)

discuss the arguments for and against outsourcing purchasing activities analyse the competition and relative bargaining power of a supply market describe a range of supply chain classifications with examples, evaluate the relative merits of 'tiered' supply chains describe and evaluate the role of an agent.

Functional structure

Board Purchasing Marketing

HR

Purchasing Manager

Divisional structure
Board Product Division A Product Division B

Product Division C

Marketing

Purchasing

Production

Matrix structure
Board

HR

Purchasing

Operations

Team A

Team B

Operational structures
Centre-led Action Network CLAN as its name suggests it retains a central team to lead and coordinate within a divisional or matrix structure Lead buyer some responsibility for buying given to a member of another function so they become part of the purchasing team Business partnering purchasing professional partnering with another functional manager.

Roles and responsibilities

Depends on the size of the organisation and the way purchasing is organised within the structure of the organisation Typical roles include Head of Purchasing, Senior Purchasing Manager, Purchasing Manager, Contracts manager, Supplier manager, Expediter What are the roles and responsibilities in the purchasing department of your organisation? Are there any part-time purchasers in your organisation?

Centralised function
Purchasing directed and controlled from one focal point Easier to control operations, communicate information and decisions and ensure consistency of approach Can employ economies of scale Easier to introduce and control standardised procedures and policies.

Decentralised function
Authority and responsibilities for purchasing exist in several different parts of the organisation May be nearer the customer or organised to take advantage of local knowledge Promotes local decision making rather than reference to a higher authority Spreads the development of skills across the organisation.

Customers of purchasing
Consider a large organisation such as a supermarket chain who are the internal customers of purchasing? How can purchasing be sure that they meet their customers needs? What are the range of services purchasing might supply such as purchasing goods and services? How might purchasings performance be measured?

Outsourcing purchasing
Drivers will vary in different types of organisations but include: cost effectiveness reduces manpower and management responsibilities risk and accountability passed to a third party current trend across the organisation it is possible to do so.

Supplier dominance
Occurs when there are many buyers so demand is high for fewer suppliers Leads to high prices and significant leverage for suppliers Buyers may keep switching to try to find the best deal despite there being few alternatives.

Buyer dominance
Occurs when there are numerous suppliers and lots of alternatives and demand is low or limited Buyer loyalty is very low and they have significant leverage Prices are depressed as the market becomes more and more competitive for suppliers.

Relative positions
(Adapted from workbook by Ian Thompson)

HIGH
Scarcity and utility of Bs resources in transaction with A

B is dominant over A

A and B are interdependent

A and B are independent

A is dominant over B

LOW
Scarcity and utility of As resources in transaction with B

HIGH

Relative positions
An organisation has a monopoly of supply when it has no competition Oligopoly is the situation when the market is dominated by a few large organisations A monopsony exist when there is only on buyer of a commodity In a cartel situation organisations agree to sell their products at a higher price than that which would be possible in a free market.

Supply chains
(Harland, 1996)
Level 1: The internal supply chain

Level 2: The dyadic supply chain

Level 3: The external supply chain

Level 4: The network

Value chain
Producer Agents or Brokers Wholesalers Retailers Consumers

Supply Chain Management (SCM)

Key benefits include: greater efficiency and elimination of waste reduced costs collaborative working to share resources and capability improved customer focus proactive problem solving, innovation and synergy effect.

Supply chain and networks

(CIPS)

The supply chain starts with the extraction of raw material (or origination of raw concepts for services) and each organisation within the supply chain adds value to the product or concept in some way as it passes from one organisation to the other The supply chain extends through to the final sale and delivery to the final customer and through to disposal What examples of supply chain networks are you aware of in your organisation? Are you aware of any competition in supply networks that you are familiar with?

Supplier tiering
(Diagram from workbook by Mike Fogg)

Network sourcing opportunities exist within tiered structures.

Agents in the supply chain

Add value to the chain by bringing parties together and assisting with negotiations Manage relationships up and down the chain Assist with communication and marketing Provide additional market information many are experts in their field (information asymmetry) Examples are PR agent or consultant acting on behalf of a client.

Purchasing contexts
Session 5 The purchasing life cycle Methods of purchase

Learning objectives
At the end of this session candidates will be able to: describe the key stages in the purchasing life cycle identify the constituent members of a cross-functional purchasing team and describe their respective roles explain the need for clearly defined business requirements and how they should be prioritised explain why purchasing on price alone is insufficient evaluate the merits of spot-buying assess the merits of long-term supply relationships

Learning objectives (contd)

with appropriate examples, describe how framework and call-off agreements operate outline how a major project is scoped, purchased and paid for identify solutions for purchasing 'low-value' orders describe the key elements in a typical 'purchase-to-pay' process.

Purchasing life cycle

(Diagram from workbook by Ian Thompson)
De-commissioning and Disposal Define Requirements

Contract Management

Specification

Receipt and Payment

Make or Buy

Contracting Source Selection

Source Identification

Cross-functional projects
Many purchasing projects require the formation of teams of people from different functions of the organisation working together Project team would be led by a project or programme manager, responsible to a steering committee which reports to the project sponsor, usually the head of procurement.

Hierarchy of needs
Assess priority of business needs before selecting a specific supplier
Innovation Cost Service Quality Security of supply Regulatory compliance

The price criteria

Price is an important consideration for buyers What are other important criteria that you might use when making a strategic purchase, such as a new piece of X-ray equipment for a hospital? How do you decide which criterion is most important?

The price criteria

(Diagram from workbook by Ian Thompson, adapted from Bailey, Farmer et al., 2005)

Price

Inspection Maintenance Delivery

Support

Inventory Training Defects Handling costs Repair Disposal Delay Consumables

Spot-buying
Simple, efficient form of purchase Immediate buying decision product purchased on the spot Why is it suitable for commodities but not for services?

Relationship spectrum of buyers and sellers

(Diagram from workbook by Mike Fogg)

The relationship spectrum - diagram 1 RELATIONSHIP SPECTRUM

distant relationships
ad ve rsa ria l arm s Le ng th tra ns ac tio na l clo se rt ac tic al sin gl e so urc ed

closer relationships
alli anc e
ou tso urc in g pa rtn ers hip
est iny cod

str ate gi c

Supplier relationship
Benefits of long-term relationship include: increased knowledge of each other reduced costs and increased efficiencies and productivity enhanced leverage for buyer as relationship develops collaborative working delivers better quality and improves responsiveness.

Risks of changing supplier

Out of the frying pan into the fire the new supplier is not able to meet targets for price, quality, delivery for example Having to return to original supplier and renegotiate contract Losing the benefits of a long-term relationship Risks are usually greater for a strategic critical supplier than a tactical one.

Framework agreements
Used for situations where parties anticipate doing business in the future but do not want to agree terms for the future Specifies detailed terms and conditions for future contracts plus other details such as review mechanism, duration of contract, service level agreements and price lists and discount structures.

Call offs
Purchase orders submitted by the purchaser against the framework agreement Relatively simple, so is often made by a junior member of staff If the offer is accepted a contract is formed (frameworks do not show contractual commitment).

Buying projects
Stages of a project are initiating, planning, executing, controlling and closing Projects may be priced in total or as a breakdown of component parts Payment is usually made at specific points or carefully defined milestones Contract Change Notice or Variation Orders allow for change in certain circumstances.

Low value buying

Require efficient payments and administration to reduce associated costs Popular methods of payment include eprocurement, purchase cards, catalogue sourcing and petty cash.

Purchase-to-Pay (P2P)
Requisition Placement of order Goods despatched Delivery and invoice Inbound inspection Goods receipt Three-way match Payment

Purchasing contexts
Session 6 The tender process Best practice purchasing

Learning objectives
At the end of this session candidates will be able to: evaluate the importance of competition to support purchasing activities appraise the relative merits of tendering describe the key stages in a tender process list the requirements of an ITT describe how tenders should be received and evaluated appraise the relative merits of e-tenders explain why it is necessary to strive for best practice explain the importance of strategy and objectives for a purchasing function describe the process of benchmarking with examples, identify ways in which technology can assist best practice.

Competition
Keeps suppliers on their toes! Encourages innovation Pushes up quality and service Minimises prices and costs.

Competitive tendering
(Dobler and Burt)

Value of goods must make it worthwhile for buyer and supplier Buyer and supplier must provide clear specifications for goods and services Market must have adequate number of suppliers Suppliers must be technically competent Sufficient time must be allowed for the process to take place.

Competitive tendering
(Dobler and Burt)

Conditions when it is not appropriate: cost of supply is impossible to estimate other criteria such as quality and service are equally important as cost situations where scope and/or cost are likely to change situations where it is more appropriate to negotiate such as complex and specific requirements.

Tender process
Preparation of tender document Prequalification of tenderers Invitation to Tender (ITT) Confirmation of intention to tender Questions from tenderers Tenders received

Tender process
Evaluation of tenders Shortlisting of tenders Post-tender negotiations (PTN) Award of contract

Invitation to Tender (ITT)

Instructions and deadline Objectives and scope Specification Explanation of award process Bill of quantities Pricing requirements Point of contact.

E-tenders
Operates as a live auction with tenderers able to place as many bids as they like during the tender period Require effective pre-tender briefing with shortlisted suppliers sent details of how to go online and bid Bids decrease over time as suppliers can view others bids (Reverse Auction) Benefits include increased competition and transparency, speed. Reduced paperwork and audit trail.

E-tenders
Four prerequisites: goods and services can be clearly defined/described value of tender is 200k and over minimum of four competing suppliers willingness to take part.

Best practice
Difficult to define - different operational systems, processes and procedures in different organisations cannot really provide a single best practice for all! Industry practice different operational systems, processes and procedures that are common across the industry, may represent best Practice.

Benchmarking
Internal Competitive Functional Generic Phases of a benchmarking exercise are planning, analysis, development, improvement and implementation and review.

Efficiency via technology

Examples include: Electronic Data Interchange (EDI) electronic catalogues EFT (Electronic Funds Transfer) bar coding Electronic Point of sale (e-pos) All are designed to speed the flow of information so the right individuals and groups have it available at the earliest possible time.

Purchasing contexts
Session 7 Understanding customer needs Purchasing for the consumer

Learning objectives
At the end of this session candidates will be able to: with examples, identify a range of customer groups both internal and external to the organisation describe how the needs of a customer may differ from the objectives of an organisation describe how customer feedback is formulated outline the ways in which purchasing activity can contribute to customer satisfaction explain the difference between customers and consumers compare and contrast consumer products and industrial products identify the key customer requirements in goods for resale describe the legislative and regulatory framework for the protection of consumers explain the importance of CSR to consumer confidence.

Who are your customers?

Its very easy to identify the external customer - the individual or group to whom your organisation provides a product or service, but who is your internal customer? Now consider how well you meet their needs. How do you know that the product or service you provide them with is what they require? What improvements can you suggest?

Customer satisfaction
Purchasing is part of the internal customer chain so its activities impact on external customer satisfaction If the goods and services provided by purchasing to internal functions are not satisfactory, the organisation will find it difficult to satisfy the external customer Purchasing should use customer feedback to improve its performance and ability to meet its customer needs.

Customer feedback
Typical customer feedback mechanisms include: satisfaction questionnaire telephone survey structured, semi-structured interview 360 degree appraisal informal chats with customers and suppliers Information should be sought from all customer groups including customer facing purchasing staff, suppliers and internal functions.

Improving performance
Learn from experience Measure standards of service Involve employees in solving problems preventing good service Use internal and external benchmarking.

Quality
Purchasing can impact directly and indirectly on quality: ensuring quality of goods and services purchased sourcing suppliers setting and monitoring supplier performance developing relationships that lead to innovation in product and process.

Consumers
Consumers are at the end of the supply chain because once the product or service is consumed then there is none to pass on Consumers are usually a member of the general public and buy consumer goods! Industrial or producer goods are those purchased by buyers in industry for industrial purposes There are differences in the legislation and regulations covering the supply of the two categories. What other differences do you think there are?

Buyer-supplier relationships
Business buyer Consumer supplier Consumer buyer

C2B

C2C

Business supplier

B2B

B2C

Goods for resale

Buyer must ensure that goods are: fit for purpose match descriptions advertised to consumers conform to safety standards can be sold at the right price match customer and consumer needs ensure goods match store image and brand, and complement own branded or white-label goods. Retail represents 24% of the UKs GDP.

Goods for resale

Important for the merchandise buyer to: understand demand for goods and source supplier who can meet that demand at the five rights negotiate with supplier on aspects of merchandising that can affect cost such as self positioning monitor and measure supplier performance.

Consumer Protection
Sale of Goods Act 1979, as amended by the Sale and Supply of Goods Act 1994 and Sale and Supply of Goods to Consumers Regulations 2002) Unfair Contract Terms Act 1977)
(Apply to England and Wales) Principle of caveat emptor exists in many countries

Consumer protection
Consumers do not have grounds for complaint if they: knowingly bought defective goods and services damaged the goods themselves made a mistake when purchasing changed their minds post purchase.

Consumer buying behaviour

Personal Characteristics
Personality Lifestyle Motivation Beliefs/attitudes Perception

Social Environment
Culture Reference groups Social Class

Individual Circumstances
Gender Age Family lifestage Income Education

Consumer decision-making processes PURCHASE

Consumer decision-making
Perception of need Information search Evaluation of alternatives Purchase Post-purchase evaluation
Decision making criteria including ethical issues

Corporate Social Responsibility (CSR)

Broadly accepted concept to describe a collection of related issues all of which combine to describe an organisations overall ethos, personality, philosophy and character Included are environmental responsibility, diversity and supplier diversity, ethics and ethical trading and impact on society As a consumer how important is it that companies have a rigorous CSR policy?

Corporate Social Responsibility (CSR)

Purchasing professionals can impact on CSR by: following organisational CSR policy sourcing goods and services from ethical suppliers collaborating with suppliers to be proactive in seeking ethical solutions setting examples and influencing top management.

Purchasing contexts
Session 8 Segmentation: direct and indirect purchasing Segmentation: products and services

Learning objectives
At the end of this session candidates will be able to: compare and contrast the key characteristics of direct and indirect purchases with examples, describe how raw materials and commodities are purchased using appropriate examples, explain how the contribution of purchasing impacts the bottom line describe the key considerations when buying for production vs. buying for stock describe the key purchasing requirements when buying perishable items compare and contrast the key characteristics of products and services describe a range of services that most organisations typically purchase outline the key requirements when specifying a service to be purchased describe how 'Managed Services' operate and assess their relative merits from a purchasing perspective.

Definitions
Direct purchases purchased from the primary supply chain of which that organisation is part of (Example: sweet manufacturer buys sugar as an ingredient, so impacts on cost of making product) Indirect purchases purchased from secondary and support supply chains (Example: sweet manufacturer buys energy to run factory which impacts on overheads).

Value chain (Porter)

(Diagram from workbook by Ian Thompson)
Primary activities:

Inbound Operations Outbound Marketing logistics logistics and sales

Margin

Procurement Secondary activities: Technology development Human resource management Firm infrastructure Margin

Purchasing commodities
Price fluctuations which will impact on cost of production and cash flow Price fluctuations may lead to decrease in value of stock help which impacts on balance sheet Market may not accept fluctuations in price so have to absorb cost increases.

Purchasing commodities
Fluctuating prices may be due to: currency fluctuations interest rates shortages, scarcity or glut world events Inflation Government policies Import and export problem.

Direct purchasing
Buyer can directly influence Contribution to cost savings impacts directly on bottom line (P&L) What examples can you think of in your organisation where cost savings have been made through the primary supply chain?

Indirect purchasing
Buyer does not have the same direct impact on bottom line However, savings that are made with third party suppliers can contribute other benefits What examples can you think of in your organisation where cost savings have been made through the secondary and support supply chains?

Potential savings
Cost savings that contribute to profitability are: cost reduction (P&L) cost reduction (non-P&L) cost avoidance.

Buying for stock

Buying for stock is different from buying for production Most organisations carry as little stock as possible mainly fast-moving items Costs involved are storage and handling, insurance, depreciation and tying up of working capital Can minimise costs by JIT delivery, asking suppliers to hold stock, improving demand forecasts and ordering minimum quantities required (Economic Order Quantity).

Perishable goods
The five rights of purchasing apply quantity, price, time, place, quality Due to perishable nature delivery and transportation are important issues for consideration Some perishable goods such as chemicals need to be transported and disposed of in specific and safe ways which adds to cost.

Services
Intangible
Is not a physical product. Cannot be stored, pricing and promotion can be difficult Cannot be stockpiled consumers have temporary ownership Consumer involved in production. Centralised mass production difficult Lack standardisation, difficult to control quality.

Perishable

Inseparable

Heterogeneous

Purchasing services
Check provider can deliver to specification Check there are no hidden costs in delivery of the service when agreeing price Check how consistency and quality of delivery will be managed Get references or view delivery.

Services purchased by bank

(Diagram from workbook by Ian Thompson)
Less importance Travel Temporary labour Construction PC maintenance Greater importance IT consultancy Security Cash operations Cheque & credit card processing

High cost services

Low cost services

Floristry Landscaping Janitorial services Dry cleaning

Training IT Hardware maintenance Mail services Voice and data network services Adapted from: Lysons and Farrington (2005)

Purchasing life cycle

(Diagram from workbook by Ian Thompson)
De-commissioning and Disposal Define Requirements

Contract Management

Specification

Receipt and Payment

Make or Buy

Contracting Source Selection

Source Identification

Specifying services
Statement of requirements, scope of works, performance specification Key content includes: specific services to be delivered quality and standards schedule for delivery place and time price and costings breakdown.

Managed services
(Diagram from workbook by Ian Thompson, adapted from Cox and Thompson, 1998)

CLIENT

DESIGNER

MANAGEMENT CONTRACTOR

WORKS CONTRACTOR

WORKS CONTRACTOR

WORKS CONTRACTOR

WORKS CONTRACTOR

WORKS CONTRACTOR

WORKS CONTRACTOR

Managed services
Functional role of provider includes: programming, resource allocation and logistics packaging of works administration co-ordination of provision quality management. What are the benefits to organisations of using a managed service approach?

Purchasing contexts
Session 9 Segmentation: capital and operational expenditure International perspectives

Learning objectives
At the end of this session candidates will be able to: with appropriate examples, describe the essential differences between capital and operational expenditure explain the sources of funding for capital and operational expenditure identify a range of capital expenditure items and describe their key characteristics with examples, explain the concept of whole-life costing using appropriate examples, describe international trade regions/zones and international trading agreements Analyse their impact on global trade identify the key driving forces behind globalisation and describe their influence on world trade identify the key considerations when purchasing from another country using examples, discuss the impact of international standards on the purchase of goods and services appraise the relative merits of off-shoring.

Operational Expenditure (OPEX)

Everyday items usually bought by purchasing Generally standard off-the-shelf items which are paid for on delivery Minimum stock held purchased as required Used as purchased, so do not incur repair and maintenance costs.

Capital Expenditure (CAPEX)

Purchasing assist rather than lead on purchase Significant financial investment for organisation Rarely standard, so design and development costs incurred Generally payment is phased as the capital investment project proceeds Valued as an asset on the balance sheet and incurs repair and maintenance costs.

Funding CAPEX
Considerations: what will it cost and why do we need it? what is the financial justification for investment? how will it be paid for and when can we expect a return on the investment? are there any other options?

Funding CAPEX
(Diagram from workbook by Ian Thompson)
Money () Accumulation of benefits

Pay-back period: Profits

Initial cost Break-even point

Time

Funding CAPEX
Sources of funding: internal reserves loan rights issue private finance initiative and PPP for public sector alternative to buy is hire or lease.

Whole-life costing
As it sounds includes total costs of sourcing, ownership, operating, maintenance and disposal To identify full effect felt by organisation accountants calculate using net present value and discounted cash flow principles If you were identifying the full cost of a capital asset, such as a piece of production equipment, what component costs would you include?

International trade
WTO and others aim to facilitate trade across borders by tackling trade barriers, such as financial levies on imported goods, on a global scale Trade blocs exist to support regional trade by lowering trade barriers Examples of trade blocs are Common Market, Free Trade Areas, Customs Unions (EU), Economic Union.

International trade
Economic principles of unrestricted or free trade: static price effect competition effect restructuring effect.

General Agreement on Tariff and Trade (GATT)

All members should be subject to same treatment as others, without prejudice (MFN most favoured nation principle) Does not discourage regional preferential free trade agreements if they represent complete removal of trade barriers for member countries (EU) Now integrated into WTO.

Globalisation
The idea that much of business, culture, politics and so on now spans the whole world and is less confined by national or geographical boundaries thanks to faster travel and communications. (CIPS) What are the main drivers for globalisation? (Market, Cost, Competition, Government).

Macro-environment
PESTEL is used to analyse the macroenvironment: political economic socio-cultural technological ecological and environmental legal and regulatory. Using this framework identify the main drivers for change for a buyer of an outdoor clothing company who is considering sourcing suppliers from abroad.

International purchasing
Reasons for sourcing internationally include: lower cost better availability or special requirements can be met better quality or innovation lack of domestic suppliers International trade agreements.

International purchasing
Issues for the buyer to consider include: cultural aspects that may affect production or delivery schedules transportation and customs language and communication difficulties currency and exchange rates payment delays and transfers legislation.

International standards
International Standards Organisation (ISO) supports: worldwide dissemination of technologies and good practices global trade improvement of quality, safety, security and protection for environment and consumer. What ISO standards are you aware of?

Incoterms
Are international consignment delivery terms Incoterms embrace many factors including, in particular, insurance, type of transport mode and associated costs, product costs, package costs and so on Examples are CFR - Cost and Freight and DDU - Delivered Duty Unpaid (named place).

Purchasing contexts
Session 10 Internal supply Transactional activities

Learning objectives
At the end of this session candidates will be able to: appraise the relative merits of internal vs. external supply using an appropriate theoretical model, describe an internal supply/value chain using relevant examples, describe the role of Shared Service Units and outline appropriate measures for ensuring their effectiveness describe the principal organisational transactions outline the role of the MMC describe the strategic and operational roles purchasing can play to support mergers and acquisitions appraise the relative merits of consortium buying.

Influences on organisational purchasing

Business Environment
External
Macro-Environment Micro-Environment

Internal
Objectives Systems Structure

Personal Characteristics
Personality Perception Motivation Beliefs/attitudes Buying style Risk tolerance

Individual Circumstances Organisational Decision-making processes

Gender Age Income Education/training Buying experience

PURCHASE

Internal or external supply

When purchasing services organisations need to decide whether to contract out or to employ their personnel to carry out the service It is often an easier decision for products make or buy is usually an economic decision about whether it is cheaper to buy or make with all the associated costs of production Does your organisation operate an internal supply chain?

Value chain (Porter)

(Diagram from workbook by Ian Thompson)
Primary Activities:

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Margin

Procurement

Secondary Activities:

Technology development

Margin

Human resource management

Firm infrastructure

Internal or external
Strategic issues include: financial constraints core business integration competitive advantage external availability internal resources.

Measuring performance
Consider a group of consultants that have been brought in to your organisation to conduct a staff attitude survey and present the results to the board What metrics would you use to measure performance? How easy would it be to measure performance if no clear objectives or standards had been set?

Service quality
Five dimensions of service quality are tangibles, reliability, responsiveness, assurance, empathy SERVQUAL is an assessment tool used to measure service quality.

Perfect competition
Item must be homogeneous Item must be transportable Existence of many buyers and sellers Absence of preferential treatment Easy communication between buyers and sellers. Most buyers operate under conditions of imperfect competition.

Imperfect competition
Monopoly only one supplier and no entry possible Oligopoly a few large suppliers and limited entry potential Monopolistic competition many suppliers who compete with each other.

Anti-competition agencies
Anti-competition agencies exist in most countries to regulate competition and restrict monopolies UK Agencies are Office of Fair Trading, Competition commission, Competition Appeal Tribunal, European Commission Competition Act 1998 and Enterprise Act 2002 prohibit anti-competition agreements and abuse of dominant positions in the market.

Mergers
Reasons include: economies of scale diversification market domination removal of competition! additional stability joint ventures offer companies mutual benefits.