click to t diploma in procurement & supply contexts of procurement & supply session 1...
TRANSCRIPT
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Diploma in Procurement & Supply
• Contexts of Procurement & Supply
• Session 1 • Categories of Procurement and Supply
Chain Management
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Session Learning Outcomes
On completion of this session you should be able to:
Explain the categories of spend that an organisation may purchase
Analyse the different sources of added value in
procurement and supply
Syllabus references 1.1, 1.3
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Direct and Indirect Procurement
• Direct procurements include:– Goods for resale, or raw materials to be
incorporated in goods for resale
• Indirect procurements include:– Other ancillary items, services and operating
expenses including goods for maintenance, repair and operating (MR0)
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Why distinguish between direct and indirect procurement?
• The quality of direct procurements has a direct impact on the quality of the goods and services produced by an organisation, whilst this is not normally the case for indirect procurements
• Direct procurements often held as stock• Generally longer term supplier relationships built up
for direct procurements• Direct procurements are more often dealt with by
the procurement and supply function, whilst indirect procurements are often dealt with by the end user
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Production materials
– Raw materials • Items extracted from the ground, such as minerals,
ores and petroleum• Agricultural and forestry products
– Components and assemblies• The finished output of other manufacturers
upstream in the supply chain
– Work in progress • Part-finished output, which is not yet ready for sale
to customers
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Commodity procurements
– Producers – the people who produce and supply the goods
– Buyers – the buyers and representatives of the consumers of products or services
– Traders – buy goods and services at one price to sell to buyers and consumers to make a profit
– Speculators – typically buy goods at a low price in the expectation that they will rise in price before they are sold on
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Goods for re-sale
– Bottom line thinking• Where the focus is on profit
– Broad assortment• A wide range of individual stock items
– Buying against supplier specifications• Buying what is available in the market place
– Short feedback loop• Due to short time span between buying and resale
– Technical complexity• Usually low technical complexity compared to manufacturing
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A ‘stocking for inventory’ policy
This approach would be adopted:
• In situations of independent demand• In situations of stable/predictable demand for low-value,
non-perishable items• Where there is a long lead time • Where items are critical for operations• Where there is a legal requirement to hold stocks• Where inventory appreciates in value over time• Where prices are expected to rise• Where demand is seasonal
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Maintenance, repair & operating (MRO ) and capital items
CONSIDERATIONS INMRO PURCHASES
CONSIDERATIONS INCAPITAL PROCUREMENT
Availability Total costs over life of asset
Cost Asset utilisation: lifespan, flexibility
Ability to use standard/generic substitutes
Space/access requirements
Ability to minimise stockholding Training, health and safety requirements
Supplier service levels Cost/availability of spare parts through the life of the equipment
Post-contract maintenance service
Options (buy, lease or hire)
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Lease or buy?
ADVANTAGES OFOUTRIGHT PURCHASE
DISADVANTAGES OFOUTRIGHT PURCHASE
Total cost is low, compared to rental
High initial expenditure ties up capital
The user has total control over the use of the asset
User bears all costs and risks of maintenance, operation and disposal
The asset may have residual re-sale value at the end of use
Risk of technological obsolescence
Capital allowances may be set against tax, and government grants may be available
Wasteful, if equipment is needed only for a short period (e.g. a particular project)
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Lease or buy?
ADVANTAGES OF LEASING DISADVANTAGES OF LEASING
No initial investment to tie up capital
Long-term commitment to pay instalments
Protects against technological obsolescence
User does not have total control of asset
Costs are known and agreed in advance
Total cost may be higher than purchase
Fewer complex tax and depreciation calculations
Large organisations may get better terms by securing their own finance to purchase
Hedge against inflation Contract terms may favour the lessor
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What is a service?
Services have been defined as:
‘Any activity or benefit that one party can offer to another that is essentially intangible and does not result in the ownership of anything’ – Philip Kotler
In a developed economy services now account for the greatest proportion of economic activity, outstripping manufacturing.
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Distinctive features of services
– Intangibility (or in procurement terms, ‘lack of inspectability’: Baily et al)
– Inseparability– Heterogeneity or variability– Perishability (or in procurement terms,
‘impracticability of storage’)– Ownership (or in procurement terms,
‘uncertainties in contractual agreements’)
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Measures of service quality
– Tangibles– Reliability– Responsiveness– Assurance– Empathy
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Monitoring service levels
– Observation and experience– Spot checks and sample testing– Business results and indirect indicators– Customer/user feedback– Electronic performance monitoring– Self-assessment by the service provider– Collaborative performance review
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Outsourcing
ADVANTAGES DISADVANTAGES
Supports organisational rationalisation and downsizing
Potentially higher cost of services, contracting and management
Allows focused investment of resources on core competencies
Difficulty of ensuring service quality/consistency and CSR
Gives access to specialist expertise, technologies and resources of contractors
Potential loss of in-house expertise, knowledge, contacts or technologies in the service area
Access to economies of scale Potential loss of control
Adds competitive performance incentives Added distance from the customer or end-user
Risks of ‘lock in’ to an incompatible or under-performing relationship
Risks of loss of control over confidential data and intellectual property
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The Kraljic matrix
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What to do now
When you’ve worked through all the learning materials and associated reading relating to this session, follow the link below to assess your learning