L4 05 Purchasing Contexts

Purchasing contexts

Session 1

Understanding organisations

Formation and regulation

of the Private Sector

Learning objectivesAt 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 organisationsPublic Sector

Includes government departments and local authorities

Focus on serving the public as ordered by

Private Sector

Includes plc, partnerships, sole traders and charities

Focus on profit, public as ordered by government

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

Focus on profit, customer needs and continuous improvement

Accountable to organisation for spending, monies raised from financial stakeholders.

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, Oxfamown 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

OTHER

FUNCTIONS

EXTERNAL

AGENCIES

Purchasing OTHER

FUNCTIONS

OTHER

FUNCTIONSOTHER

STAKEHOLDERS

CUSTOMERS

THE

PURCHASING

TEAM

Governance

� Legislation – legal framework within which organisations must act, for example Employment law

� Regulations – operating conditions or � 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 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 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� Local community

� Potential employees

� Media

� Suppliers

� Distributors.

Private Sector regulation

In the private sector regulation exists to

protect the interests of:

� consumers

� domestic market� 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 2Session 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 � 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 (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)� 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 manufacturerComponent 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 controlcontrol

� 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


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


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 importantagility in the supply chain is important

� Many products are branded and sellers require volume sales for viability hence the name!


Technology

� Main market segments are hardware, software, telecommunications and services

� Examples include IBM, Dell, Intel and MicrosoftMicrosoft

� Rapidly expanding industry which relies heavily on intellectual capital and research and development


Service characteristics

Intangible

Perishable

Cannot be stored, displayed or protected through patents. Pricing and promotion can be difficult

Cannot be stockpiled -Perishable

Inseparable

Heterogeneous

Cannot be stockpiled -consumers have temporary ‘ownership’

Consumer involved in production. Centralised mass production difficult

Lack standardisation, difficult to control quality.

Services

� Quality is measured through consideringtangibles, reliability, responsiveness, assurance, empathy

� Two dimensions of service are people and � Two dimensions of service are people and process


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: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 � 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 � 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 � 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


� describe the defining characteristics of the Third Sector (voluntary and not-for-profit organisations)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 not-for-profit and voluntary organisations

Learning objectives (cont’d)

� 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 � 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: Charity

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

Financial contributions, time and support

CHARITY DONOR

Financial contributions, time and support

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 (not-

for-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 organisation’s 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?


(CSR)

Drivers to improve CSR within purchasing

are varied and include:

� customers and other stakeholders� customers and other stakeholders

� public opinion or media

� employees or trade unions.

Budget cycle

Budget request

Review against objectives

Budget allocationBudget 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 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:

What it means:

Less than 1 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.

Exactly 1 The cost of investment is exactly the same as the Exactly 1 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.

More than 1 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.

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 oppositebeing 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 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 � 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


� compare and contrast a range of functional models for purchasing

� describe the typical roles and � describe the typical roles and responsibilities within a purchasing function

� appraise the relative merits of the 'part-time' 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


� 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 classificationsclassifications

� 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 CProduct Division C

Marketing Purchasing Production

Matrix structure

Board

Purchasing OperationsHR Purchasing OperationsHR

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, � 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 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

customer’s needs?customer’s needs?

� What are the range of services purchasing

might supply – such as purchasing goods

and services?

� How might purchasing’s performance be

measured?

Outsourcing purchasing

Drivers will vary in different types of

organisations but include:

� cost effectiveness � 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 suppliersleverage 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)

B is dominant over A

A and B are interdependent

HIGH

Scarcity and utility of B’s

resources in transaction with A

A and B are independent

A is dominant over B

LOW HIGHScarcity and utility of A’s

resources in transaction with B

Scarcity and utility of B’s

resources in transaction with A

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 organisationsis 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 chainLevel 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� 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 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


� describe the key stages in the purchasing life cycle

� identify the constituent members of a cross-functional purchasing team and 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


� 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)

Define Requirements

Contract Management

De-commissioning and

Disposal

Specification

Make or Buy

Source Identification

Source

Selection

Contracting

Receipt and Payment

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

CostCost

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 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

SupportInspection

Defects

Inventory

Repair

Training

Consumables

Delivery

Support

Delay

Inspection

Handling costs

Maintenance

Disposal

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 1The relationship spectrum - diagram 1RELATIONSHIP SPECTRUM

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Supplier relationship

Benefits of long-term relationship

include:

� increased knowledge of each other� 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 � 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 � 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 partsbreakdown 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 e-� Popular methods of payment include e-

procurement, 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


� 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� 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 servicesspecifications 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 � 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)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� 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 � 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/describeddefined/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)� 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


� 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 � 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?

� It’s 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 serviceproblems preventing good service

� Use internal and external benchmarking.

Quality

Purchasing can impact directly and

indirectly on quality:

� ensuring quality of goods and services purchasedpurchased

� 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!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

B2B B2CBusiness supplier

supplier

Goods for resale

Buyer must ensure that goods are:

� fit for purpose

� match descriptions advertised to consumersconsumers

� 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 UK’s GDP.

Goods for resale

Important for the merchandise

buyer to:

� understand demand for goods and source supplier who can meet that demand at the 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)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 � 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

Social Environment•Culture•Reference groups•Social Class

IndividualCircumstances•Gender•Age•Family lifestage•Income•Beliefs/attitudes

•Perception•Income•Education

Consumer decision-making processes

PURCHASE

Consumer decision-making

Perception of need

Information search Decision making

Evaluation of alternatives

Purchase

Post-purchase evaluation

making criteria including ethical issues


(CSR)

� Broadly accepted concept to describe a collection of related issues all of which combine to describe an organisation’s overall ethos, personality, philosophy and charactercharacter

� 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?


(CSR)

Purchasing professionals can impact on

CSR by:

� following organisational CSR policy� 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


� 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 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)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

logistics

Outbound

logisticsOperations

Marketing

and salesMargin

Secondary

activities:

Firm infrastructure

Human resource management

Technology development

Procurement

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 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)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 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 itemspossible – 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 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

Perishable

Is not a physical product. Cannot be stored, pricing and promotion can be difficult

Cannot be stockpiled -consumers have temporary Perishable

Inseparable

Heterogeneous

Cannot be stockpiled -consumers have temporary ‘ownership’

Consumer involved in production. Centralised mass production difficult

Lack standardisation, difficult to control quality.

Purchasing services

� Check provider can deliver to specification

� Check there are no hidden costs in

delivery of the service when agreeing 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)

TravelTemporary labourConstructionPC maintenance

Greater

importance

Lessimportance

High cost services

IT consultancySecurityCash operationsCheque & credit card processing

Low cost services

FloristryLandscapingJanitorial servicesDry cleaning

TrainingIT Hardware maintenanceMail servicesVoice and data network services

Adapted from: Lysons and Farrington (2005)

Purchasing life cycle(Diagram from workbook by Ian Thompson)

Define Requirements

Contract Management

De-commissioning and

Disposal

Specification

Make or Buy

Source Identification

Source

Selection

Contracting

Receipt and Payment

Specifying services

� Statement of requirements, scope of

works, performance specification

� Key content includes:� 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

DESIGNERMANAGEMENT

CONTRACTORCONTRACTOR

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 9Session 9

Segmentation: capital and operational

expenditure

International perspectives

Learning objectives


� 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 characteristicsdescribe 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 � 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?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)

Pay-back period:

Money (£)

Accumulation of benefits

Time

Initial cost

Profits

Break-even point

Funding CAPEX

Sources of funding:

� internal reserves

� loan

� rights issue� 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 � 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� 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 � 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)travel and communications. (CIPS)

� What are the main drivers for globalisation? (Market, Cost, Competition, Government).

Macro-environment

PESTEL is used to analyse the macro-environment:

� political

� economic

� socio-cultural� 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 schedulesor 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 practicesand 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, � 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


� 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 � 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 EnvironmentExternal Internal

Macro-Environment Objectives

Micro-Environment Systems

Structure

PersonalCharacteristics•Personality

•Perception

•Motivation

•Beliefs/attitudes

•Buying style

•Risk tolerance

IndividualCircumstances•Gender

•Age

•Income

•Education/training

•Buying experience

OrganisationalDecision-making

processes

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

Outbound

LogisticsOperations Marketing

& SalesMargin

Secondary

Activities:

Firm infrastructure

Human resource management

Technology development

Procurement

Margin

Internal or external

Strategic issues include:

� financial constraints

� core business� 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 potentiallimited 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, � 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� diversification

� market domination

� removal of competition!

� additional stability

� joint ventures offer companies mutual

benefits.

Documents

L4 05 Purchasing Contexts