D1- Contexts in Procurement and Supply

Key Definitions & Concepts in only 20 pages

Essential pass notes

CIPS LEVEL 4 DIPLOMA

By D Dearing © version1.0

Contexts of procurement and supply L4 unit content

1.0 Understand the added value that can be achieved through procurement and supply chain management

1.1 Explain the categories of spend that an organisation may purchase • Definitions of procurement and purchasing and supply

Purchasing describes all those transactional processes concerned with acquiring goods and services, including payment of invoices.  It is a narrower term than procurement, describing reactive, tactical processes. Procurement describes all those processes concerned with developing and implementing strategies to manage an organisation’s spend portfolio in such a way as to contribute to the organisation’s overall goals and to maximise the value released and/or minimise the total cost of ownership. Procurement is a more comprehensive term than purchasing, which is more focused on the tactical acquisition of goods and services and the execution of plans rather than the development of strategies. (CIPS Glossary)

• Typical breakdown of organisational costs represented by procurements of goods, services or constructional works

Many organisations now have as much as 80% of their turnover comprising bought-in goods and services.In any manufacturing industry the materials cost ranges from 50 to 80% of the product cost, depending on the nature of the product procurement of goods through purchase accounts for about 50% of the money spent by the average industrial enterprise and ranges from 20 to 90% among different industries. Hence, the financial aspect of purchasing is of great importance. Outsourcing is increasing as firms concentrate on their core capabilities/ competencesProfit-Leverage Effect- a reduction in purchase spend increases profit more than an equal sales increase- A decrease in purchasing expenditures directly increases profits before taxes

• Stock and non-stock procurementsBuying for stockStock refers to additional materials and goods that are purchased as back up or spare resources. It helps in times of supply shortage or if a supplier has delivery problems, therefore reducing the risk of stopping the production process. In recent years, holding stock has been seen as a detrimental activity that adds cost to the organisation but little value. As such, the concept of 'stockless purchasing' has become increasingly popular. Nevertheless, every organisation holds something in stock, even if it just items of stationery.Buying for productionSuch items are bought to support a specific production schedule. This might be continuous or batch. Materials / goods are therefore bought against a known demand and once that demand has been satisfied there should be no left over (redundant stock).Buying for production requires direct links with production schedules and accurate demand forecasting.The study guides also discusses stock to order- where materials are only procured as required to fulfil orders received from customers. Example jobbing manufacturers, construction- which requires specific supplies

• Direct and indirect procurements

Direct spend refers to purchases of goods and services that are directly incorporated into a product being manufactured. Examples include raw materials, subcontracted manufacturing services, components, hardware, etc.

Indirect spend refers to purchases of goods and services that are not directly incorporated into a product being manufactured. Examples include computers, safety goggles, printed forms, office supplies, janitorial services, equipment, furniture, bags and packaging, wrapping supplies, store fixtures, receipt and point of sale supplies, floor cleaning products, building service and facilities maintenance supplies, etc.

• Capital purchases and operational expendituresThe most frequently quoted differences relate to: destination (point of use), the length of their lifecycle and cost. Capital expenditure is sometimes referred to as ‘investment expenditure’. In general they are one-off items which form part of the company’s asset base. Examples include: premises, plant, machinery, heavy equipment and hardware and / or infrastructure. Purchasing provides support rather than a lead role and financing the expenditure is an important consideration.. It MUST yield a benefit for a period of more than one yearOperational expenditure is referred to as ‘revenue expenditure’ and relates to day-to-day spend that the organisation needs to perform its everyday operations. Operational expenditure includes: raw materials, professional services, energy, training, marketing, travel, facilities management and maintenance. Such items are frequently purchased and purchasing takes the lead role in the acquisition process.

• Services procurementsThe characteristics of services that make them distinctive are as follows.Intangibility: refers to the lack of substance that is involved in service delivery. Unlike goods there are no physical aspects, no taste, no feel etc. This can inhibit the choice of a customer to use a service, as they are not sure what they will receive.Inseparability: a service often cannot be separated from the provider of the service. The creation or the performance often occurs at the same instant that a full or partial consumption of it occurs. Goods must be produced, then sold, then consumed (in that order). Services are only a promise at the time they are sold; most services are sold and then are produced and consumed simultaneously.Variability: many services face a problem of maintaining consistency in the standard of output. Variability of quality in delivery is inevitable because of the number of factors that can influence it. It may prove difficult or impossible either to attain precise standardisation of the service offered or to influence or control perceptions of what is good or bad customer service.To minimise the impact there is a need to monitor customer reactions. Perishability: services cannot be stored. Seats at a concert, provision of a lecture, services of a dentist consist of their availability for periods of time. Perishability presents specific marketing problems. Meeting customer needs in these operations depends on staff being available as and when they are needed. Ownership: services differ fundamentally from goods in that purchase does not result in a transfer of property. The purchase of a service only confers on the customer access to or rights to use a facility — not ownership. This may lower the customer’s perception of the service’s value.Services involve a higher degree of customer contact and presentation than with the selling of a product. The physical delivery of a service is less of a problem as the service element is intangible.

1.2 Analyse the different sources of added value in procurement and supply• The five rights of procurement

1.The right quality: quality as ‘conformance to specification’ and ‘fitness for purpose’, the costs of getting quality wrong, specifications and quality, approaches to managing supplier quality2.The right quantity: determining the quantity required, factors influencing the choice of how much to buy, minimum order levels and values 3.The right place: in bound transportation of goods to the delivery point, issues arising from international transportation4.The right time: internal, external and total lead time and factors that influence lead time, expediting, measuring supplier delivery performance5.The right price: the different types of cost, and where purchase price fits in, factors affecting how a supplier prices their products or services

• Achieving the right price for procurements from external suppliersThe right price: the different types of cost, and where purchase price fits in, factors affecting how a supplier prices their products or services

• Defining total life cycle costs or the total costs of ownershipWLC is a technique used to establish the total cost of acquisition and ownership. It is a structured approach which addresses all the elements of cost and can be used to produce a spend profile of the product over its anticipated lifespan.

• Achieving quality, timescales, quantities and place considerations in procurements from external suppliers

Quality- approved suppliers, clear specifications, ISO9001, kaizen etcQuantity- ROL systems, use of MRP, Time- understanding supplier lead times, agile supply chains,JIT/Lean, expediting, use of liquidated damage clauses.

• Other sources of added value such as innovation, sustainability and market developmentInnovation involves the conversion of new knowledge into a new product, process or service and the putting of this new product, process or service into actual use-Johnson & Scholes 2010. From a procurement viewpoint this can be– a change in the procurement process itself. Indeed, innovation in procurement processes may be an essential precursor to the active use of public procurement to stimulate innovation in suppliers and the wider economy. It can also be in Public procurement “the purchase of goods or services that do not yet exist” (European Commission 2005).Sustainable procurement as "a process whereby organisations meet their needs for goods, services, works and utilities in a way that achieves value for money on a whole life basis in terms of generating benefits not only to the organisation, but also to society and the economy, whilst minimising damage to the environment" (Department for Environment, Food and Rural Affairs, 2006). Sustainable procurement considers the environmental, social and economic consequences of design, materials used, manufacturing methods, logistics and disposal. Sustainable Development is defined as “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs”. Brundtland Report:

• Defining value for moneyVfM is defined as the optimum combination of whole-of-life costs and quality (or fitness for purpose) of the good or service to meet the user’s requirement. VfM is not the choice of goods and services based on the lowest cost bid. (HM Teasury 2006)It is also often described in terms of the ‘three Es’ – economy, efficiency and effectiveness.

1.3 Compare the concepts of procurement and supply chain management

• Definitions of procurement, supply chains, supply chain management and supply chain networks“A supply chain is that network of organisations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer or consumer”.Lysons 2012Supply Chain ManagementThe CIPS (Positions on practice: 8) defines supply chain management (SCM) as "the continuous planning, developing, controlling, informing and monitoring of actions within and between supply chain links so that an integrated supply process results which meets overall strategic goals." Alternatively, SCM is the:"process of strategically managing the movement and storage (if necessary) of materials, parts and finished product from supplies, through the manufacturing process and on to customers or end user, as well as the associated information flows"(Yeo and Ning, 2002:256).Supply Chain NetworksAccording to Christopher (1994), a supply chain is “a network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer.”

• The length of a supply chainThe supply chain may be long, with numerous tiers, or short, with few tiers. As an example, the network structure for bulk cement is relatively short. Raw materials are taken from the ground, combined with other materials, moved a short distance, and used to construct buildings

• Definitions of logistics and materials managementMaterials Management“is the planning, organisation and control of all aspects of inventory embracing procurement, warehousing, work in progress and distribution of finished goods”.Logistics is;“The total management of the key operational functions in the supply chain – procurement, production and distribution. Procurement includes purchasing and product development. The production function includes manufacturing and assembling, while the distribution function involves warehousing, inventory, transport and delivery”.-Lysons Farrington 2012

• Comparisons of supply chain management with procurement“procurement is a sub leg of the modern Operational environment of the Company's Supply Chain Operations" that have the responsibility of managing the Supply chain with in the operation, The sub directives of the supply chain may include. 1. Materials Sourcing, 2. Procurement, 3.Distrubution, 4.Inventory Control, 4.Warehouse management, 5.Production Materials Flow Planning est., 6.Vendor/Supplier Sourcing, Materials Supply Contracting, in fact any activity regards Materials and service supply may fall under the umbrella of "Supply Chain Management”

1.4 Differentiate the stakeholders that a procurement or supply chain function may have• Defining stakeholders

A stakeholder is a person who has something to gain or lose through the outcomes of a planning process or project. Stakeholders can be organisations, groups, departments, structures, networks or individuals. The best definition of this is by Freeman, who in 1984 defined a stakeholder as: ‘Any group or individual who can affect or [be] affected by the achievement of an organisation’s objectives’.

• Examples of stakeholders for a procurement or supply chain functionEnd users, suppliers, marketing, purchasing, engineering, finance etc.

Internal stakeholders exist within the boundaries of the organisation.Connected stakeholders are those outside the organisation – such as suppliers, partners, customers and shareholders – who have a direct interest in the organisation’s activities.External stakeholders include national and local government, the public and pressure groups.

• Mapping stakeholders for a procurement or supply chain functionYou can use the grid (Mendelow) to organize/map stakeholders according to their interest and power. Influence = Power x InterestStakeholders with high power and interests aligned with the purpose are critical to achieving your purpose.Stakeholder mapping in 4 steps1. Define your stakeholders 2. Analyse stakeholders by power and interest –to establish their importance/influence.3. Plan Manage stakeholder communications and reporting 4. Engage with your stakeholders

2.0 Understand the stages of sourcing processes in creating added value outcomes that can be achieved with suppliers 2.1 Explain the main aspects of sourcing processes• Defining the stages of a generic sourcing process from identification of needs to contract and supplier management

Identify the need/ Define the need/specification/ Develop the contract/ Source the market/ Appraise the suppliers/ Invite quotes/tenders/ Analyse quotes/ Negotiate best value/ Award the contract/ Contract management

• Analysis and planning, tender management and contract managementCircumstances in which a competitive tendering exercise might not be the best approach to making a purchase.• Urgency: • Commercial confidentiality or national security • Value of the purchase: if this is insufficient to justify the costs and time of tendering, negotiating with one supplier might be better. • Production costs cannot be measured accurately: • Price is not the only criterion for supplier selection and contract award. • Tooling or set-up costs are major factors: • Intellectual Property Rights and monopoly: these might prevent meaningful competition because there is only one supplier. When is it appropriate? Past question-Dobler and Burt have suggested the following 5 conditions for the appropriate use of competitive tendering;1.The value of the goods or services to be purchased must be large enough to justify the expense for both parties2.The specification needs to be clearly defined for both buyer and seller alike.3.The market must comprise an adequate number of suppliers.4.The suppliers must be technically qualified and competent to fulfil the requirements. Similarly they must actually want the business.5.There must be sufficient time to allow the tender process to be fulfilled.Benefits? Transparency etc. competition- audit trails etc.

• Differentiating between pre contract award and post contract award stagesThe following are typical pre-contract activities: •Assembling/analysing the views of stakeholders

•Market and Spend analyses•Developing a supply strategy (including a risk assessment/exit strategy) •Drafting specifications and agreed requirements•Pre-qualification of potential suppliers if appropriate •Drafting and circulating the Invitation to Tender documentation •Evaluating tenders and possible supplier audits/post-tender meetings •Awarding of contractsIf this is a contract renewal, in addition to the above, other activities will include:•Reviewing the supplier performance over the contract period•Analysing stakeholder perceptions of supplier performance.•Requesting the supplier’s contract renewal proposals or the decision to re-tender the businessPost-contract activities include:•Administration of the contract, including any subsequent agreed contract changes•Continuous assessment of performance and re-assessment of risk within the contract•Handling of stakeholder complaints•Chairing any agreed supplier/buyer contract review meetings

2.2 Analyse the main stages of a sourcing process• Stages of the sourcing process that relate to defining needs, creation of contract terms, supplier selection, contract award and contract or supplier management

Need to explain what happens at each stage see other sections.• The purpose and added value that is created by each of the stages of the sourcing process

‘Value-added’ may be defined as the achievement of financial savings or benefits that are not based on changes in unit price. Examples include:•Changing the specification of the product or service•Substituting lower cost inputs•Improving operational efficiency.P2P /E-procurement systems enable inputs to be bought and paid for electronically. The main saving is time as purchasing officers can procure inputs more quicklyIn detail the Purchasing Steps/stages/cycleFor example defining the needs- specification – the benefits or value added are that they :■ Communicate to professionals in the supply management department what to buy.■ Communicate to prospective suppliers what is required.■ Establish the tangible goods to be provided.■ Establish the intangible services to be provided, such as warranty, maintenance, andsupport.■ Establish the standards against which inspections, tests, and quality checks are made.■ Balance the specification goals of individual departments, relevant suppliers, desiredproduct or service performance and cost.A further TWO can be added to this list• Define the needs • Supports standardisation

2.3 Explain how electronic systems can be used at different stages of the sourcing process• Erequisitioning, ecatalogues, eordering, esourcing and epayment technologies

E-catalogues: these can be viewed online or downloaded by purchasers. This can speed up the location of potential suppliers as well as suitable products or services.E-tendering: involves using e-RFQs and specifications posted online or e-mailed to potential suppliers. Bids can be received and evaluated electronically, speeding up tendering and sourcing considerably.

E-auctions, using the buyer’s or seller’s website, or third party auction sites: suppliers offer goods online, and potential buyers bid competitively. Bids are ‘open’ so buyers may raise their offers competitively during the auction. At the end of the bidding period, the highest bid wins. Reverse auction: here the buyer specifies its requirements, and suppliers submit competitive quotes. Bids are open, so suppliers may lower their prices competitively during the auction. The lowest bid compliant with the specification wins.Online supplier evaluation data: (e.g.) third party reports, customer feedback, registers and directories of approved or accredited suppliers, benchmarking reports, market intelligence tools, etc. Thus, supplier appraisal (visits, etc.) would be speeded up considerably.E-Sourcing provides on-line support for six processes: (1) business intelligence (gathering and evaluating the information needed to make a purchasing decision), (2) configuration (defining buyer needs to develop specifications), (3) supplier search, (4) supplier authentication, (5) product authentication and (6) valuation (price discovery, negotiation, award of contract) (Amelinckx et al., 2008). It helps organisations to provide efficient, simple and auditable means for managing sourcing and contract management activities, improve the visibility of sourcing activities, increase opportunities for suppliers to interact with buyers "openly, collaboratively and ensuring fair and open competition" (Ministry of Justice). E-purchasing comprises of both e-sourcing and e-procurement which together cover the entire purchasing cycle in an attempt to automate or improve the process of purchasing activity. The effect on the relationships involved both internally and externally will depend on the appropriateness of the technique used, the provision of suitable hardware and software for users and the respective power of the users involved. The use of epurchasing tools can either enhance and deepen close collaborative relationships or can serve to drive down prices with little regard to the suppliers’ interests.

• The impact of electronic purchase to pay (P2P) systems on the sourcing process

P2P -Purchase to payRefers to the business process that cover activities of requesting, purchasing, receiving, paying for and accounting for goods and services. CIPS acronyms

see section 3.4 for full explanation

2.4 Analyse the relationship between achieving compliance with processes and the achievement of outcomes• Organisational needs for structured sourcing processes

•It ensures that all tasks have been performed that need to be performed•It ensures adequate co-ordination of effort between parties collaborating in a process•It helps to maintain consistency in processes and outcomes,•It prevents conflict and sub-optimal behaviour•It fosters efficiency•It supports good governance and managerial control•It supports compliance with relevant standards, law and regulation•It enables the documentation and sharing of good practice•It enables meaningful process analysis, problem-solving and improvement•It supports the systematic development of procurement staff, systems, technology and other resources•It supports the devolution of some procurement tasks to non-procurement staff

• The relationship between process compliance and the achievement of added value outcomesAdvantages for an organisation of following a structured sourcing process

- ensuring all activities are undertaken, co-ordination and collaboration between parties, avoiding duplication and waste, avoids conflict, consistency, balancing differing objectives and goals. A structured process can also support good governance and avoid ‘reinventing the wheel’. It promotes compliance and documentation ensures delegation and future projects can be easily managed.Exam question- Outline the potential impact of complex compliance requirements on the achievement of positive outcomes in the sourcing process.… such compliance requirements lead to organisations becoming rigid, inflexible and inwardly focused. They become resistant to change and incapable of adapting to changes in customer demand. Initiative and innovation are stifled and organisations tend to become bureaucratic.

3.0 Understand the main aspects of organisational infrastructure that shape the scope of a procurement or supply chain function

3.1 Explain the main aspects of corporate governance of a procurement or supply chain functionThe rules, policies, processes and organisational structures by which organisations are operated, controlled or regulated, ensure that they adhere to accepted ethical standards, good practices, law and regulation. CIPSThe definition of corporate governance most widely used is "the system by which companies are directed and controlled" (Cadbury Committee, 1992). Governance in procurement refers to the overall systems and procedural arrangements to ensure that the procurement process applies appropriate levels of control and probity

• Conflicts of interestA conflict of interest can be assumed to exist when an employee or someone in his/her immediate family is involved in a business relationship or arrangement, the terms of which may be inconsistent with, or appear to be inconsistent with performance of the employee's duties or exercise of judgment on the organisation’s behalf.

• The need for documented policies and procedures for procurementWhy is procurement governance important?

•Potentially control large sums of organisational funds•are faced by many opportunities to commit financial fraud or to misuse systems or information for personal gain•Their decisions typically benefit some suppliers over others – creating an incentive for suppliers to try and influence those decisions

Reasons governance standards are important in procurement•included avoiding fraud, •supplier influence, •stewardship role, •credibility and reputation and •maintaining ethical performance

• Organisational accountability and reporting for procurement roles and functionsMay have delegated authority for defined levels of expenditure.i.e. low value transactions less than £1000 may only need 1 quote and be signed off by a local officer. £5-50,000 may need authorisation by a section manager etc.Reporting depends upon structure i.e. centralised, hybrid, etc. see section 3.3+See below

• The status of procurement and supply chain management within organisationsCan be strategic or operational focused. Depends upon organisation, spend, and capabilityAt the highest level of development procurement may be on the senior management team and maybe the board.at lowest level may be a clerical function.

• Codes of ethics in procurementCIPS has developed its Corporate Code of Ethics as part of its commitment to reinforcing ethical values across all procurement and supply practices. The voluntary code can be adopted by organisations across the world, of any size and from any sector, and sets out the values, business culture and practices the organisation must demonstrate.

Corporate ethics are a set of principles that guide the way your organisation conducts itself in its dealings with customers, suppliers, employees and regulators. By creating a set of established principles, an organisation is publicly declaring its intent to behave ethically and responsibly in its practices. The CIPS Corporate Code of Ethics is an established guide which, when adopted, will demonstrate impartiality, transparency, professionalism and accountability.

• The CIPS code of ethics – for members not CorporationsEnhance and protect the standing of the profession, by:

never engaging in conduct, either professional or personal, which would bring the profession or the Chartered Institute of Procurement & Supply into disrepute

not accepting inducements or gifts (other than any declared gifts of nominal value which have been sanctioned by my employer)

not allowing offers of hospitality or those with vested interests to influence, or be perceived to influence, my business decisions

being aware that my behaviour outside my professional life may have an effect on how I am perceived as a professional

Maintain the highest standard of integrity in all business relationships, by: rejecting any business practice which might reasonably be deemed improper never using my authority or position for my own financial gain declaring to my line manager any personal interest that might affect, or be

seen by others to affect, my impartiality in decision making ensuring that the information I give in the course of my work is accurate and

not misleading never breaching the confidentiality of information I receive in a professional

capacity striving for genuine, fair and transparent competition being truthful about my skills, experience and qualifications

Promote the eradication of unethical business practices, by: fostering awareness of human rights, fraud and corruption issues in all my

business relationships responsibly managing any business relationships where unethical practices

may come to light, and taking appropriate action to report and remedy them undertaking due diligence on appropriate supplier relationships in relation

to forced labour (modern slavery) and other human rights abuses, fraud and corruption

continually developing my knowledge of forced labour (modern slavery), human rights, fraud and corruption issues, and applying this in my professional life

Enhance the proficiency and stature of the profession, by: continually developing and applying knowledge to increase my personal

skills and those of the organisation I work for fostering the highest standards of professional competence amongst those

for whom I am responsible

optimising the responsible use of resources which I have influence over for the benefit of my organisation

Ensure full compliance with laws and regulations, by: adhering to the laws of the countries in which I practise, and in countries

where there is no relevant law in place I will apply the standards inherent in this Code

fulfilling agreed contractual obligations following CIPS guidance on professional practice

3.2 Analyse the impact of organisational policies and procedures on procurement • Aspects that can be included in procedures for procurement and supply such as responsibilities for procurement, regulations relating to competition, levels of delegated authority, responsibilities for the stages of the sourcing process, invoice clearance and payment

See next bullet• The use of procurement policies, procurement strategies and procurement manuals

A policy is a governing set of principles which establish the general parameters for an organization to follow in carrying out its responsibilitiesProcurement policies refer to long-lasting statements of guidance (CIMA, 2005) that apply to and bind directors, managers and employees in any situation where they are involved in a purchasing process (CIPS: Purchasing Policy and Procedures)The procurement policy statement is a public document. It can be quoted in annual reports, operating and financial reviews, shareholder/stakeholder information and is freely available to potential suppliers. The policy statement communicates the principles on which the organisation procures and contracts to management, staff, actual and potential suppliers and contractors, customers, governmental and other regulators and stakeholders (CIPS: Purchasing policy and procedures).A procurement policy manual should, at a minimum, establish guidance for the procurement organization and any delegated purchasing authority that includes:

1. Authorities, roles, and responsibilities of the central procurement office2. Establishment of the Chief Procurement Officer, or other lead procurement professional, as the procurement authority for the organization that includes guidelines for: Appointment and qualifications of the Chief Procurement OfficerTenure, removal, and compensation of the Chief Procurement OfficerAuthorities, roles, and responsibilities of the Chief Procurement Officer3. Authorities, roles, and responsibilities of the delegated purchasing authority (if any) Appointment, qualifications, and training of personnel Authorities, roles and responsibilities of personnelReporting and oversight requirement

A procurement policy manual should, at a minimum, establish guidance for source selection and contract formation …A Purchasing Manual embraces Purchasing Policy (action guidelines) and Purchasing Procedures (what has to be done and how).Lysons & Farrington 2008 suggest the manual content might include:

• Statement from C.E.O or similar• Purchasing organisation- charts job descriptions etc• Policy statements-supplier selection, terms and conditions of purchase, • Procedures-flowcharts and descriptions• Emergency purchasing arrangements• Supplier development• Relationship management

• Managing risk

• The involvement of internal functions and personnel in the sourcing process

Main involvement will be in in identifying the need, agreeing the specification. May be cross functional teams – i.e. in supplier appraisal, Links to stakeholder management.

• Responsible purchasing and the International Labour Organisation core conventions

Labour core standards are but ONE aspect of CSR- they do not cover bribery, corporate governance or environmental/sustainability issues- but are fundamental to companies to ensure ethical supply chains. Corporate Social Responsibility. it is a business principle that encompasses ethical trading, social responsibility and environmental sustainability. Although it relates to all aspects of organisational activities, purchasing and supply has particular emphasis on the practices of external party suppliers and their contracts with the organisation. ILO Core Labour Standards

1.Forced Labour Convention, 2.Freedom of Association and Protection of the Right to Organise Convention, 3.Right to Organise and Collective Bargaining Convention, 4.Equal Remuneration Convention, 5.Abolition of Forced Labour Convention, 6.Discrimination (Employment and Occupation) Convention, 7.Minimum Age Convention, 8.Worst Forms of Child Labour Convention,

For example PWC state in their responsible purchasing policy “Suppliers should comply with all relevant legislation in the countries in which they operate and all relevant International Labour Organisation (ILO) conventions”.The study guide discusses the ETI code of practice:The ETI Base Code which is based upon the ILO core conventions states:

1. Employment is freely chosen 2. Freedom of association and the right to collective bargaining are respected 3. Working conditions are safe and hygienic 4. Child labour shall not be used 5. Living wages are paid 6. Working hours are not excessive 7. No discrimination is practised 8. Regular employment is provided 9. No harsh or inhumane treatment is allowed

3.3 Compare the different structures of a procurement or supply chain function• The use of centralised and devolved structures

Centralised organizations leverage corporate spending and drive standard sourcing, process, and technology decisions as well as execution from a central command and control group. While offering greater spending leverage and operational efficiencies, centralized structures result in higher incidences of unapproved spending, process circumvention, and uneven performance. Centralized organizational models provide economies of scale that improve spending power, enhance operational efficiencies and knowledge sharing, and enforce process and policy standardization. While good in theory, centralized procurement models have not always

performed well in practice. This has particularly been the case in large, geographically dispersed organizations, especially those that have grown through merger and acquisition. In these environments, site and plant managers often resist centralization, feeling that centrally mandated supply decisions and policies slow operations and do not satisfy local supply and quality needs. As a result, centralized procurement groups often report high incidences of unapproved (“maverick”) spending, process and policy circumvention, and uneven supply measurement and performance The Case For Centralised Procurement•Centralized purchasing involves having a central location within the organization to buy goods and services for the organization. •Centralized purchasing provides for less duplication of resources and processes•Centralized purchasing also provides for efficiency and effectiveness in contracting or purchasing •Centralized purchasing also brings about major bulk discounts because of volume purchases and economies of scaleDecentralized Procurement Structures Decentralized organizations empower business units and sites with autonomy and control over supply, process, and technology decisions. In a decentralized environment, sourcing decisions and procurement activities are executed by individual business units or plants. This structure improves satisfaction at the site and business unit level and speeds process and issue resolution by avoiding much of the bureaucracy and “red tape” that comes with centralized procurement models.However, the decentralized organizational model comes with many negative side effects. Decentralized models optimize to the individual site level, and neither fully leverage corporate spend nor support the supply or business objectives of the organization. In such environments, there is little coordination or information sharing between divisions and sites. Decentralized models do not share systems, expertise, and resources across sites, resulting in higher operating costs and uneven supply cost and performance across the enterprise.

Considerations in the decision (Centralise or not)- 7 criteria to consider- learn!!!

1.Commonality of purchase items2.Geographic location3.Supply Market Structure4.Savings potential5.Expertise Required6.Price fluctuations7.Customer Demands

• Hybrid structures of a procurement or supply chain function (such as consortium structures, shared services, lead buyer structures, and outsourced) Interacting with other people and building rapport

Centre-Led Procurement: Model for Strategic Operations Hybrid or Multi-Level- was called CLAN on old unitCLAN = centre led action networkThe multi-level approach attempts to obtain the advantages of both the previous modeIs. The division of duties between the two levels which Is designed to achieve this are as follows:Central office:

•Determination of purchasing strategies and development of purchasing policies•Standardisation of procedures, specifications, codes and forms•Negotiation of contracts for commonly used items against which local departments can place delivery orders for supplies as required•purchase of major plant and equipment•importation of supplies from overseas•responsibility for legal matters•inter-plant stock transfers and stocking policy •responsibility for training•research and information service.Local Offices•Responsibility for placing orders for 'non-contract' items•placing delivery orders for contract items.In this group purchasing system, the manager at the local level would be responsible to his local line management. The manager at the central office would usually act in a staff capacity. That is, the latter would not have executive authority, as such, over the local manager, but would act in an advisory capacity.A SCAN structure (Strategically controlled action network) where those responsible for purchasing are still based in the business unit but report directly to a central purchasing function and then secondarily to the business unitConsortium Structures‘A collaborative arrangement under which two or more organisations combine their requirements for a specified range of goods and services to gain price, design, supply availability and assurance benefits resulting from greater volumes of purchases.’-Lysons. A consortium is a group of independent organisations that combine requirements for the purchase of goods and services and aim to gain more favourable terms with suppliers using the power of the combined group. Costs to support one representative buying team will be shared among the group. The membership of the group is not always static and it is difficult for the supplier to build relationships with the individual members. The categories purchased tend to be transactional and the relationship with suppliers is appropriate to this. (up to 2 marks)AdvantagesThe group can benefit from improved pricing and terms through increased volume, often in the form of discounts.Framework agreements will work well reducing the administration cost and complexity for individual members especially for low value items.The consortium can combine its knowledge/expertise for certain products and services to enhance the purchasing process, specifications and negotiations. DisadvantagesCosts involved in communication, coordination and development of staff and policy.Transparency of each member’s activity is required for the representative team to make correct purchasing decisions and some members may resist this sharing of information.There is a risk for extended decision processes which can be inefficient and unattractive to suppliers.There is no mandate; members are not obliged to purchase the agreed specification, which could undermine the contract terms. The consortia must ensure that EC competition rules are adhered to.

Shared Services- Shared services provide an opportunity to reduce waste and increase efficiency through reorganising resources and sharing investments between business units Definition"A shared service is a collaborative strategy in which a subset of existing business functions are concentrated into a new, semi-autonomous business unit that has a management structure designed to promote efficiency, value generation, cost savings, and improved service for internal customers of the parent organisation, like a business competing in the open market” (Bergeron, 2003).Some common features and requirements of the shared services concept are: separate organisation and/or management of the shared services centre, standardised processes and operations, scale operations and effective use of systems, and the service management approach. Purchasing and supply management are among the functions that are most suited for a successful migration to shared services. Other functions include financial services (including general accounting and payroll), facilities management, human resources (including recruitment and training), sales and marketing, IT, customer service, R&D, health and safety, and legal services (CIPS: Shared Services).Lead buyer structuresLead buyership. In this case the business unit that has the greatest volume for a specific type of commodity is made responsible for negotiating a corporate agreement with the supplier involved. This business unit collects all relevant data from all other units and negotiates with the supplier. Each individual business unit periodically releases orders directly to the supplier referring to the appropriate contract conditions.

• The need for customer service and value for money outcomes

See 1.2

3.4 Explain the common IT systems that can be used by a procurement or supply chain function• P2P systems

The P2P process consists of many sub-processes from sourcing, ordering, receipting, payment through to contract and relationship management. Through automation, components of the process can be either removed or deskilled improving efficiency and reducing costs.Purchase to pay (P2P) is a "seamless process enabled by technology designed to speed up the process from point of order to payment" (CIPS Australia, 2006:20). The P2P cycle includes all the stages "from the initial identification of requirements, to the procurement/purchasing of the item, through the receipt of the goods ... to the payment of the supplier once the goods are received" (Monczka et al., 2009:42).It involves three way matching of purchase order, goods received note and the invoice.

• Systems for inventory managementMRP= materials requirement planning= A product-oriented computerised technique aimed at minimising inventory and maintaining delivery schedules-CIPS definition. It can have closed loop.MRPII= manufacturing resource planning= an expansion of MRP to include greater integration with information from other parts of the organisation. It is closed loop MRP with financial control modules. MRPII is an extension of closed loop MRP ands includes financial planning and ‘simulation’ capabilities.

RFID- Radio-frequency identification [RFID] is a technology that allows a reader to capture information from an electronic tag using radio waves. The technology has applications in identifying and tracking inventory, assets and vehicles. It may replace some barcoding applications as multiple RFID tags can be read at once and without the line of sight needed with a barcode. See also International Article Number.

• Enterprise Resource Planning (ERP) technologiesEnterprise Resource Planning [ERP] systems are integrated computer systems that share management information across many departments within an organisation. For example, most systems include finance modules, human resource systems, customer relationship management, procurement and inventory control systems, amongst others. The purpose is to enable the flow of information between managers within the organisation and create a single version of data so that decisions are based on consistent views of common data.

• Communications systems for internal and external useIntranets- ExtranetsDistinguish between intranets, extranets and the Internet. In summary, they refer to different levels of access – the Internet is public, the intranet is restricted to organisations and employees, while an extranet is restricted to access beyond the company. Intranet – definition: It is a private network within a single company using Internet standards to enable employees to share information using e-mail and web publishing. An intranet is a network that operates only internally within an organization.Extranet – definition: It is formed by extending the intranet beyond a company to customers, suppliers and collaborators. An extranet is defined as a network that allows specific external sources, be they individuals or organizations, to have limited access to a firm.

4.0 Understand the need for compliance with requirements when undertaking procurement activities in different sectors4.1 Identify different economic and industrial sectors• Economic classifications including public and private sectors, charities, not for profit and third sector

Private SectorThe private sector consists of business activity that is owned, financed and run by private individuals. These businesses can be small firms owned by just one person, or large multi-national businesses that operate around the world (globally). In the case of large businesses, there might be many thousands of owners involved. The goal of businesses in the private sector is to make a profit.Public SectorThe public sector is the part of the economy where goods and services are provided by the government or local authorities. These goods and services are sometimes provided free and in other cases consumers have to pay a price. The aim of public sector activity is to provide services that benefit the public as a whole. This is because it would be difficult to charge people for the goods and services concerned or people may not be able to afford to pay for them. The government provide these goods and services at a cheaper price than if they were provided by a profit making company. The public sector accounts for about 40% of all business activity.Public Sector Organisations

The public sector refers to all the businesses and organisations which are accountable to central or local government. They are funded directly by the government and they tend to supply public services rather than produce products for a profit.Central government pays for the public goods and merit goods through taxation (e.g. Income Tax), whereas local governments pay for the services they provide through Council Tax (formerly Community Charge and, before that, through Rates).

The National Audit Office describes the third sector as:A range of institutions which occupy the space between the State and the private sector. These include small community and voluntary groups, registered charities both large and small, foundations, trusts and the growing number of social enterprises and cooperatives.The Office for the third sector, established in 2006, defines third sector organisations as:

“Non-governmental organisations that are value driven and which principally invest their surpluses to further social, environmental and cultural objectives”.

• Industrial classifications and sectors such as manufacturing, retail, construction, financial, agriculture and service

Manufacturing- Industries making chemical, mechanical, physical material transformations, substances, and components into consumer and industrial goods.The UK retail sector covers all business that sell goods to the public, from large chains and department stores through to independents and virtual stores. Retailers often sit at the heart of communities and the sector employs over 10 per cent of the UK workforce, making it Britain’s largest private sector employerConstruction- Construction is a large, dynamic, and complex industry sector that plays an important role in the UK and U.S. economy. Construction workers and employers build our roads, houses, and workplaces and repair and maintain our nation's physical infrastructure. Construction work can involve building of new structures, which may include activities involved with subdividing land for sale as building sites or preparation of sites for new construction. Financial Sector-The financial sector is a component of a nation's economy created by the ebb and flow of capital in the financial industry. Financial services include everything from personal banking to the insurance industry, and they can make up a sizable portion of a nation's economy. Evaluation of the true value of the financial sector can be complicated, as the financial industry involves a great deal of paper pushing which can sometimes be difficult to track and pin down. Financial institutions like banks, insurance companies, brokerage houses, investment firms, and so forth are all part of the financial sector. Service-The segment of the economy that provides services to its consumers. This includes a wide range of businesses including financial institutions, schools, transports and restaurants.Also known as "tertiary sector of industry," or "service industry/sector".

• Codes of ethics in procurement including the CIPS Code of Ethics Repeated see 3.1

4.2 Analyse the impact of the public sector on procurement or supply chain roles• Objectives of public sector organisations such as improving services, communities and corporate social responsibility

Improving services, communities and corporate social responsibility- ensuring value for money

• Regulations that impact on procurement and supply chain operations

Regulation is: “a set of rules (generally based in law) with compliance monitored by a public sector Agency”.Public Sector Regulations

•EU procurement directives- led to Public Contracts Regulations 2006- updated 2015- All public procurement must be based on vfm (defined as the optimum combination of whole-life cost and quality to meet the user’s requirement) which should be achieved through competition, unless there are compelling reasons why this is not possible- impact is:

Advertising- above threshold need to advertise in OJEUContract Award Procedure1. The open procedure-2. The restricted procedure-3. The competitive dialogue procedure-4. The negotiated procedure-In this procedure, tAward Criteria- Lowest price or MEATRight to feedback- 10 day 'standstill period', enabling unsuccessful bidders the opportunity to seek information about the procuring body's award decision before a contract is concluded.Other provisions- frameworks – electronic purchasing

•Anti-corruption law•Freedom of information law•Review by the National Audit Office (central government and public bodies) and the Audit Commission (local government authorities)

• Need for competition, public accountability and value for moneyAccountability is the obligation to explain to someone how well you have met your responsibilities. Value for money see 1.2The original aim of public procurement policy in the European Union was to dispel discrimination and government protectionism in public procurement. The purpose of the rules is to open up the public procurement market, ensuring the free movement of goods and services within the EU. In most cases they require competition. The EU rules reflect and reinforce the government’s procurement policy focus on value for money.

4.3 Analyse the impact of the private sector on procurement or supply chain roles • Objectives of private sector organisations such as profitability, market share, shareholder value and corporate social responsibility

Objectives- profitability, market share, shareholder value and corporate social responsibilityDefinition of 'Shareholder Value'-The value delivered to shareholders because of management's ability to grow earnings, dividends and share price. In other words, shareholder value is the sum of all strategic decisions that affect the firm's ability to efficiently increase the amount of free cash flow over time.Links to CSR and the concept of the triple bottom line- economic social environmental performance- companies increasingly set major objectives in these areas

• Regulations that impact on procurement and supply chain operationsThe regulatory framework impacts as follows:•Compliance with standards: purchasing needs to ensure all goods and services relating to the principal activities of the company are compliant with relevant standards and specifications. •Health and safety: all sourced activities, good and services need to comply with the relevant health and safety standards

•Environmental: similarly, all sourced activities, goods and services need to comply with the relevant environmental regulations. •Cost: particularly relevant where the regulator has placed a price-cap on the goods or services produced. Purchasing needs to ensure it delivers cost effective solutions for the company's third party expenditure.•Governance: purchasing may be required to demonstrate that probity, due diligence and due process has been followed when sourcing or outsourcing from third parties. An example of this in the US relates to the provisions of the Sarbanes-Oxley Act. In UK it a code known as the Corporate Governance Code •Clear audit trail: purchasing may be required to maintain files on key transactions to demonstrate they have been fair and acted within the due process and with probity.•EU directives: although usually referring to public sector procurement will also apply for utilities (such as energy, water and telecommunications). •Appropriate service levels: particularly relevant when third party suppliers have been sourced to undertake a service that touches the customer (such as call handling, deliveries, inspections or engineering).

• The importance and role of brandingIn Principles of Marketing, by Philip Kotler and Gary Armstrong a brand is defined as ‘a name, term, sign symbol or a combination of these, that identifies the maker or seller of the product’. A brand name helps an organisation differentiate itself from its competitors. In today's competitive world customers expect products to have branding. Customers often build up a relationship with a brand that they trust and will regularly purchase products from that brand. Some people will only purchase a particular brand even though there are acceptable alternatives on the market. For example Apple Inc or UK retail chain John Lewis Partnership have a loyal customer base, who provide them with repeat business. Brand EquityHow much is a brand worth? Brand equity refers to the value of a brand. Brand equity does not develop instantaneously. A brand needs to be carefully nurtured and marketed so consumers feel real value and trust towards that brand.Links strongly to Corporate social responsibility and Ethics- ethical scandals canlead to reputation damage.

4.4 Analyse the impact of the not for profit or third sector on procurement or supply chain roles • Objectives of the not for profit or third sector

Non-profit: third sector organisations raise funds and generate financial surpluses in order to invest in social, environmental, or cultural objectives. They do not seek to make profits as an end in its own right.Values-driven: third sector organisations pursue specific goals which are often aligned with particular social and political perspectives. They may be associated with or work with political parties, but a political party is not a third sector organisation.May be multiple service objectives and expectationsOxfam objective is to implement sustainable program to help poor people improve their lives and livelihoods. Oxfam is a well-known NGO with over 100 branches globally.

• Regulations impacting on charities Charity CommissionThe Charity Commission has a statutory objective to ensure trustees comply with their legal obligations in managing charities and to promote public trust and confidence in charities more generally. They also have a statutory function to identify and investigate abuse and mismanagement in charities. By:

Providing information, advice and legal consents Encouraging charities to use their resources efficiently and adopt good practice, in

order to improve:• their effectiveness in meeting their aims• the public’s confidence and trust in them

The primary way they do this is by publishing online resources and guidance for charities, their advisers and the public. Carrying out investigationsMost problems in charities can be resolved by the charity trustees themselves. Others will be examined and resolved by the Commission without the need to open an investigation. Working with other agencies, Regulators and departmentsTo regulate a diverse sector as effectively as possible they have built effective strategic and operational relationships with a range of other regulators, law enforcement and other government departments..Monitoring charitiesRegulatory oversight is one way in which they investigate concerns about abuse and non-compliance in the sector. Preventing abuse in the first placeAn important part of their role is to help charities protect themselves by raising awareness of the risks to the sector and compliance requirements, and by providing targeted advice, guidance and support.The charity commission provide guidance on Internal Financial Controls for CharitiesInternal financial controls are essential checks and procedures that help charity trustees:1.meet their legal duties to safeguard the charity's assets;2.administer the charity's finances and assets in a way that identifies and manages risk; and3.ensure the quality of financial reporting, by keeping adequate accounting records and preparing timely and relevant financial information.They recommend that:

1. Records of payments (including direct debit, BACS, or standing orders) are checked periodically to cheque stubs, credit card statements or bank statements - these checks may often be carried out as part of the bank reconciliation processes;2. Periodic checks are made to ensure payments are supported by invoices which have been properly authorised;3. Regular review of standing orders and direct debit payments are made to ensure payments remain in accordance with valid instructions given to the bank or building society;4. Expenditure from restricted funds is in line with the restriction placed on how funds are to be used

These checks should be made by someone other than the person concerned with the original recording of the transactions.

• Need for regulated procurement exercisesVoluntary organisations acknowledge that regulation(or indeed regulated procurement exercises) has many positive benefits, that it: •provides assurance that provision meets a basic standard; •contributes to accountability and transparency through external scrutiny; •provides an objective view leading boards and staff to question how they do things; •focuses attention on standards; •increases their credibility because they generally compare favourably with public and private sector organisations; •provides assurance that public money is being spent appropriately; •increases funder confidence; and

•supports sector advocacy for higher standards for service users and for the funding to meet these standards.