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Diploma in Procurement & Supply
Business needs in
Procurement & Supply
• Session 1• Business Needs and Procurement
Decisions
Session Learning Outcomes
On completion of this session you should be able to:
Analyse how business needs influence procurement decisions
Explain the criteria that can be applied in the creation of a business case
Syllabus references 1.1., 1.3.
What are business needs? Organisation’s needs certain inputs (things) in order to
perform their activities and achieve their objectives
These things may be classed as goods or services
Procurement are notified of the need for these inputs in a variety of ways
The task of procurement is to meet these needs through achieving what is called the “5 Rights” of Procurement.
The five rights of procurement
Products of the right quality, supplied
in the right quantity
to the right place
at the right time
for the right price
Development of procurement
Reck and Long identify four strategic stages of the development of a procurement function
Passive IndependentSupportive Integrative
The procurement cycle
Identifying needs
• Someone in the organisation needs something
• That need cannot be met
• Procurement are notified
Notifying Procurement
Requisition form
Bill of Materials (BOM)
Feasibility study / cost benefit analysis / business case
Bill of Materials
Business Case
A Business Case:aims to gain approval for a project or activity
requiring significant organisational commitment by clearly demonstrating how it meets the needs of the business / its business benefits
We will be discussing Business Cases in more detail later.
Defining needs
Specifications
Service level agreements (SLA’s)
Contract terms
Key performance indicators (KPI’s)
Types of purchases
Below are three generally accepted categories of business to business (B2B) purchases.
Straight re-buyModified re-buyNew buy
New buy
A new buy offers procurement the opportunity to: undertake purchasing researchundertake value engineeringpromote early buyer involvement (EBI)promote early supplier involvement (ESI)develop specifications, SLA’s, contract
terms, KPI’s, etc
Procurement categories
Capital procurements Production materialsMaintenance report and operating (MRO)
suppliesCommoditiesGoods for resale
The Kraljic procurement portfolio matrix
The Business Case in more detail The main objectives of the Business Case Process include:
Fostering strategic, business-focused thinking Improving the efficiency and quality of decision-making Enabling management to evaluate proposals for feasibility,
suitability and acceptability Enabling management to compare alternatives and options Establishing measurable yardsticks by which the subsequent
performance, deliverables or outcomes of projects can be evaluated
Is the project or asset achieving the business case benefits anticipated?
Are the assumptions made in the business case turning out to be accurate?
Is the business case justification for the project still valid?
An informal business case structure
A formal business case structure
Executive summary Reference Context Value proposition Scope Deliverables Impacts Work planning Resource requirements Risk management and contingency plans Commitments
Cost benefit analysis •Costs £•Computer equipment:
8 PCs @ £1,000 8,000 1 server @ £1,200 1,200 2 printers @ £400 800 Installation and technical support 1,800 Purchasing management software 3,200•Staff training: Introductory computing (6 people × £200) 1,200 Purchasing management system (8 people × £400) 3,200•Other costs:
Lost time (20 person days @ £100 per day) 2,000 Cost of errors/wastage through initial inefficiencies (estimate) 5,000•Total cost 26,400•Benefits (estimate, per year) £• Improved efficiency of ordering and expediting 20,000
Improved supplier selection and management 10,000Improved planning and control through supply information 15,000
•Total benefit (per year) 45,000•Benefit/cost ratio: 45,000/26,400 = 1.70 (positive)•Payback time: 26,400/45,000 = 0.59 year = approximately 7 months
Lease or buy?
Corporate and purchasing objectives
Tactical objectives and timescales
A business case must also ensure that the procurement will for example:
Secure supply within the timescales required by wider production, marketing or project plans
Secure adequate levels of performance and process control within the timescales required by wider organisational and project plans
Be feasible within existing resource constraintsBe capable of fulfilling agreed specifications and
achieving agreed objectives, standards, targets and KPIs