CIPS Module 1 - Introduction to Procurement and Supply - 1.1
What do procurement professionals do involving capital purchases?
Evaluate potential suppliers Involved in preparing specifications Review quality and standards Assess ethical requirements Compare buy or lease options Investigate transport Review packaging options Research total life cost Calculate current differences Benchmark prices Ensure assets are fit for purpose
What categories do organisational costs fit into?
Fixed Variable Direct Indirect
Examples of Fixed costs Variable costs
Fixed - salaries of management team, insurance, rent on an office or facility Variable - raw materials, haulage costs, wages for hourly workers
Define the following Capital purchases Operational expenditure Budget Depreciation Cross functional activity
Funds used by a business to make a substantial investment in long-term fixed assets, often one time purchases (aiming to make money with the spend) Costs associated with the running of an organisation, such as electricity or gas A financial plan for a set period of time on how much can be spent The reduction over time in the value of an asset held by a company, often due to the wear and tear. An amount for this is treated as an annual cost in their accounts. Individuals from different departments working together to achieve a common goal
What is the purpose of the kraljic matrix?
Helps to develop a purchasing strategy for products which your organisation is procuring Aiming to maximise profit while also attempting to minimise risk Profit impact (high are important as they determine profit margins) and supplier risk on each axis
Define the following Primary sector Primary sector products Secondary sector Secondary sector products Production organisation Sector
Industry sector that extracts raw materials Products that are extracted from their natural source such as an iron ore Industry sector that manufactures things Products converted in the manufacturing or assembly process, such as cars An organisation that makes or manufactures products A classification given to an area of industry, society or economy to distinguish it from other areas
Define Tertiary Tertiary sector
Industry sector which provides services Services delivered to individuals and other industries as the third stage of the production and manufacturing process such as banking
Describe and give examples of service procurement?
Intangible Cleaning contracts Insurance Utilities such as electricity, gas and internet access They can often be one off requirements or can be long term contracts Specifications need to be very specific so it is known what is required
Why does stock procurement need to managed effectively?
It is directly linked to inventory costs in order to keep these costs as low and effective as possible. If not this can cause problems for an organisation such as lowering profits whereas a well managed one can result in higher profits
How do procurement professionals influence sundries?
Sundries are goods or services of low value, these should be sourced through procurement As they have the knowledge of which suppliers offer the best value
The Purchasing process
1. Define Specification. 2. Select Supplier 3. Contract Agreement 4. Ordering 5. Expediting 6. Evaluation Follow up
What does cost mean within an organisation?
A cost within an organisation is an amount payable in return for receiving something, usually involving money. Examples include: Time Effort Materials Opportunity
Define the following. Specification Total Life Cost Benchmark Assets Invitation to Sender Expenditure Economies of scale
A detailed description of what is required The total amount a product will cost an organisation throughout its life Compare an element of one business such as price, quality or service to another The value of everything an organisation owns Documents inviting potential suppliers to quote for business The amount of money spent by a business The trend of cost per unit being reduced as output increases due to factors such as increased bargaining power, and the cost of tooling being share among larger numbers of units
Define the following Prototype Sundries Carriage Deals Fleet In-House
A sample or a model of an idea or concept Miscellaneous goods or services, usually of low value Negotiations to achieve the best possible costs A group of vehicles used by an organisation An activity conducted within an organisation by its own workforce
Describe the basic function of procurement
A strategic process of obtaining something, this may be tangible (physical product) or intangible (not a physical product) Procurement involves the buying of goods and services that enable an organisation to operate their supply chains, in a profitable and ethical manner
State 5 elements of procurement
Added value Cost Inventory Logistics Purchasing Quality Supply Waste management
How do procurement professionals influence TRAINING?
Aiming to reduce the costs of training through negotiation of booking with providers For example, grouped training of employees could help to negotiate lower group purchase of a course
Describe what is meant by organisational budgets?
Budgets are used to monitor income and expenditure. Without this a company would not know how much it would be able to spend. Two types of budgets CAPEX budgets - relative to capital expenditure and includes capital purchases OPEX budgets - relate to operations expenditure
State the differences between CAPEX and OPEX?
CAPEX asset with purpose to last a long time whereas OPEX is an ongoing expense to an organisation CAPEX often paid in a lump some or bank loan whereas OPEX is paid monthly or annually CAPEX accounted for and depreciates over time whereas OPEX is accounted for in the current month or year CAPEX has high value whereas OPEX has low to medium value
State the typical cost breakdown for an organisation.
Capital purchases - machinery building etc Insurance - premiums to protect against theft Marketing - advertising Raw materials - components needed for manufacturing products Salaries/pensions - salary and company pensions Services - support services such as cleaning Training - for staff deployment Utilities - electricity, gas etc Vehicles - company cars or haulage cost
Describe FIVE distinctive features of capital procurements
Capital purchases relate to the assets of an organisation and are usually purchased to help a business develop and grow and to keep up with market and competitive trends. They are often referred to as "the spending of money with a view to making money". They are also usually one off purchases such as land, property, equipment and machinery. They differ from Operational expenditure which is incurred by the business to ensure the efficient and effective day to day running of the business and which include the likes of rent, raw materials, and salaries, insurance and so forth Price is only one element, and sometimes not the most important one The monetary value of assets Negotiations can be complex and extended due to the complexity of the 'package' of benefits being sought over the asset's lifecycle Capital procurements tend to be unique or non-recurring, without similar recent purchases on which to base the present procurement decisions. Each new acquisition must be evaluated afresh Specifications are difficult to draft due to their uniqueness and technical complexity, which usually involve elements of service such as research, installation, training, after-sales service, etc.
Give examples of non stock intangible procurements?
Cleaning service Telephone system Internet contract Organisational insurance Advertising campaign
Examples of Direct costs Indirect Costs
Direct are associated directly with a job or contract, for example construction of an office and the costs associated Indirect are not directly associated with a job or contract, often referred to as overheads, for example salary of support staff, rent of head office, phone contracts Remember direct costs are directly associated with the job whereas indirect costs are not.
How do procurement professionals influence VEHICLES, TRANSPORT AND HAULAGE?
May involve company cars, company trips etc Procurement can help advise upon the best choices for vehicles Haulage rates and carriage deals can be negotiated to require the best cost
Can procurement be done without purchasing
No, they go hand in hand one cannot happen without the other
How do procurement professionals influence RESEARCH AND DEVLEOPMENT?
Procurement are involved in the sourcing of prototypes or new materials for trials This means we can source products at a higher value through past relations with suppliers, reducing time as well as funding needed
What is the difference between procurement, purchasing and supply?
Procurement is a strategic process of obtaining something for the lowest total cost of ownership Purchasing is the physical transaction involving buying something. Supply is the infrastructure which ensures that products and services get from supplier to consumer Purchasing = wider and less limited approach, functions involved in buying goods and services, emphasis on cost not value, reactive approach Procurement = broader approach, involving more events before, during and after, related to acquiring good and services, emphasis on value not cost, proactive approach
How might MARKETING teams work with procurement teams?
Procurement teams often source promotional materials used by marketing departments Attending trade fairs, procurement can ensure that costs are as low as possible.
What is non stock procurement?
Products not stored within an organisation and must be procured externally, they could be one off capital purchases They are NOT listed on an organisations inventory They belong to the tertiary sector
Give some examples of raw materials, components and finished goods
Raw - coal, cotton, fish, oil Components - lightbulbs, nuts and bolts, castings, metal housing Finished goods - Shoes, confectionary, clothes, jewellery
What does stock procurement include?
Raw materials - products in their natural form, coming from the private sector Components - manufactured in the secondary sector, these are used to make a product Finished goods - may be involved in manufacturing, production or retail sector. In retail they are purchased for resale.
Give examples of operational expenditure?
Rent Insurance Transport Raw materials Salary
How does risk impact direct procurement?
Risk relates to how important a product or service is to an organisations functionality Failure to supply high risk products can reduce in trading, therefore they should be managed more closely Relationship with the supplier will be based upon, importance, cost and associated risk
Describe each section of the Kralijic matrix including: Location on the scale Examples Approach
Routine suppliers - Low profit impact and low impact on supply. Often the handling of the supply is worth more than the supply itself Such as office supplies Reduce the administration cost burden Leveraged items - High profit items with low risk on supply as they are abundant Price can be negotiated easily and switching suppliers can be done easily aiming to reduce power Bottleneck items - Low value items but can only be supplied from few/one supplier Ensure continuity of supply, long term contract Develop a plan to reduce dependency on this supply Strategic Items - Significant financial impact and are in low supply Ensure collaboration and strategic partnerships are formed
How do procurement professionals influence SALARIES?
Salaries are not directly influenced by procurement If procurement processes are effective and driving high value and reducing costs, a company is more likely to be able to provide higher salaries and better benefits
Describe and define Indirect procurement
Services, tools and equipment that do not form part of the finished product but are required to maintain the business and production process, e.g., repairs, stationery, consultancy These are needed to allow an organisation to keep functioning Sourced from various different suppliers, causing supplier relationships to be very different from those in direct More likely to be from a leveraged or routine supplier less likely to involve relationship management
Describe the features of direct procurement?
Sourcing and supply of a product or service that is directly related to a specific end result such as raw materials used to make an end product It is integral to an organisation, purchasing a large number of raw materials, needed for production at the best possible rates
What is the output of a business?
The amount of good or services an organisation is producing or supplying
Define Cost impact Risk impact Indirect procurement Direct procurement
The amount of money spent on a particular product or service The assessment of potential risk to an organisation Services, tools and equipment that do not form part of the finished product but are required to maintain the business and production process. Purchasing large quantities of raw materials needed for production, at the lowest possible rates
What is added value?
The difference between the selling price of a product and the cost of materials and components Aiming to reduce the cost when obtaining products without compromising of quality
Define the following Inventory Strategic Purchasing Supply Expediting
The stock of goods, materials or products which are accessible High level planning, including setting direction and long term goals Act of physically ordering and buying something, including ordering and expediting. The infrastructure which ensures that products or services get from the supplier to the customer The process involved in the progress of an order to ensure stock is received as quickly as possible
Why it is important to monitor capital purchases?
The value of capital purchases reduces over time, this is reflected in the organisational budget. However much it reduces by is known as depreciation. We can work cross functionally with the accounts department to assess how it may depreciate
What are RAW MATERIALS, how do procurement teams have involvement with raw materials?
They form are large amount of an organisations expenditure Procurement teams aim to ensure that stock which comes in as inventory is kept to a minimum cost Aiming to achieve a lower cost per product, without increasing purchase quantity resulting in higher inventory costs
Describe... Leverage suppliers Strategic suppliers Routine suppliers Bottleneck suppliers
Those who have high cost impact yet low risk impact to an organisation Vast competition, low cost to move suppliers Those who have both high risk and high cost impact to an organisation Critical supplier, responsible for core products. Those who have both low risk and low cost impact to an organisation Low value items, lots of work associated with these suppliers, lots of variety Those who have low cost but high risk to an organisation Low value items, little or no other options
Briefly describe the procurement cycle?
Understanding a need Market analysis Develop strategy Pre procurement Develop document Supplier selection Issue RFQ Bid/tender Contract awarded Warehouse logistics Contract performance SRM management Asset management
How can total costs rise when fixed costs remain the same?
When output increases the variable costs increase and this will influence the total cost of the business output.
Outline FIVE differences between purchasing goods and purchasing services (10)
• Goods are tangible, services are intangible: therefore, services cannot be measured, weighed or otherwise inspected: an SLA is usually needed. • Services cannot be separated from their supplier: goods can be delivered and stored before they are required, whereas, services are produced and consumed simultaneously. • Heterogeneity: goods are usually uniform in nature while services are unique at each delivery because the personnel and circumstances are always different, making them difficult to 'standardise'. • Services 'perish' immediately on delivery whereas goods can be stored until required. Planning ahead is required so that the service is available when needed. • Products are easier to specify, being tangible. Services are harder to prescribe because of their intangible and heterogeneous nature. • Ownership: services have no transfer of ownership making it difficult to define when a service has been fulfilled and when risk and liability have passed from seller to buyer. • Services require a higher level of human involvement and interaction especially services carried out for people (e.g. travel services). Quality will depend, to some extent, on the behaviour of the recipient as well as the service provider. • Goods are usually purchased for immediate use whereas services may be purchased for long periods of time.
