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L4M4- Chapter 1- Options for sourcing requirements Flashcards

1
Q

What is sourcing?

A

It is part of procurement strategy where the optimal organisations are identified to become suppliers of product or a service to an organisation.

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2
Q

What is the difference between tactical (aka operational) and strategic sourcing?

A

Tactical:
- Low level decision making for low risk or routine items
- High profit, low risk
- short term projects
- transactional relationship

Strategic:
- Top level decision making
- High profit, high risk
- Long term
- Collaborative

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3
Q

Sourcing aims to achieve the best value for money but considering multiple factors. What are examples of factors to consider?
Letters = SQEADC

A

Cost/Price- important but cannot be considered in silo
Delivery- e.g. lead times and freight costs fair
Quality- meet the spec
Ethics- codes of practice
Sustainability- sustainable existence and for the environment
Availability- competitive prices are irrelevant if there is no availability

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4
Q

What are the stages of the CIPS procurement cycle?

A

B - Business need
A - Market Analysis
S - Strategy development
PP - Preprocurement market testing
DD - Develop documentation
SS - Supplier selection
I - Issue tender
E - Evaluate responses

A - Contract award
R - Receipt, warehousing, logistics
P - Performance review
S - SRM
A - Asset management

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5
Q

What is outsourcing?

A

Contracting an external supplier to manage and run a function that was previously done in house.

Not everything can be outsourced

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6
Q

Why might outsourcing be a preferred option for procurement staff? (SIRFTR)

A
  • Financial benefit- to effectively manage value for money within an organisation
  • Technological- Suppliers have knowledge and the machinery (meaning you do not need to invest in modern equipment)
  • Resource - no need to recruit additional staff or invest in training
  • Skillset- supplier may have better or specialist skills
  • Improved focus - organisation can look at its core roles
  • reduce risk- another organisation will have this responsibility if outsourced
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7
Q

The make or buy decision is made at stage 2 of the procurement cycle (market analysis)- what should be considered here?

A

What is the product or service- do you want greater control

Current organisation capacity- dont want to negatively impact the other business units

Market situation- could you leverage economies of scale with other suppliers for example. Also consider STEEPLED analysis

Competition- power of buying organisation vs the supplier e.g. if there are no alternative suppliers then the buyer may struggle to negotiate improved costs. (competition is part of porters 5 forces)

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8
Q

STEEPLED is used for understanding the external forces on market analysis, what does it stand for?

A

S- social
T- technological
E- environmental
E- economic
P- political
L- legislative
E- Ethical
D- demographic

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9
Q

When might you want to make something vs decide to buy?

A

Make=
- Want to be self sufficient
- Have capacity
- Want greater control
- Stable workforce
- No suitable suppliers
- reduced risk
- want to amend volume/spec regularly

Buy=
- specialist knowledge required
- small volumes are not cost effective to make
- cheaper to buy in
- Do not have the required machinery to make
- no capacity
- no inventory
- want to reduce overheads

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10
Q

What is intracompany trading?

A

Business conducted within a company eg. between departments or between divisions in a global company.

Often happens when teams have individual budgets

May be a central team who purchase all of the stationary and then ‘sell’ it on to other teams internally or specialist teams who have capacity to purchase things externally that other teams do not (e.g. certain electricals)

It can mean centralised purchasing can achieve the benefit of economies of scale rather than multiple teams trying to purchase the same thing individually

Important consideration for make or buy decisions.

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11
Q

What are the different structures of a procurement function?

A

Centralised
Decentralised
SLAN
CLAN
Distributed network

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12
Q

What is a transfer price?

A

Amounts of money payable between divisions within the same organisation that have conducted business with each other. e.g. supplying labour

It is audited closely to ensure honest and fair pricing internally

There can be tax benefits to this when trading internationally so it is closely monitored by global intracompany trading (e..g moving profits to where taxes are most favourable)- however there are strict rules to avoid tax evasion

It can also benefit the recipient countries economy

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13
Q

What is the OECD and what do they do?

A

Organisation for the economic cooperation and development

Create the guidelines for transfer pricing to abide by international tax laws

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14
Q

What are the benefits and drawbacks of transfer pricing?

A

Adv:
- Can save money on tax
- Can benefit the recipients countries economy
- Entire organisations can have fixed pricing
- Helps teams with meeting their budgets
- no physical money involved

Disadv:
- Need to comply with OECD
- Where some economies will benefit, others may be negatively affected
- Local sourcing may be better than global

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15
Q

What is the Kraljic matrix for?

A

Assessing suppliers based off profit impact and supply risk

Can be:
Strategic
Bottleneck
Leverage
Routine

Bottleneck, leverage and routine are all tactical sourced areas.

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16
Q

What are the costs associated with outsourcing?

A

Procurement team time to establish if outsourcing is a practical option

Evaluating, selecting and awarding the contract

Managing the outsourced contract

Employment of external contract managers (to remove it from procurements role portfolio)

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17
Q

What is core and non core work?

A

Core work or services are integral to an organisation. They are critical and relate closely to the strategies and objectives. These should not be outsourced

Non core work or services are things that are outside of the core or primary revenue/value for the business. More likely to be outsourced

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18
Q

What is in the outsource matrix?

A

used to decide whether to outsource or keep in house

This has strategic importance on the Y axis and contribution to performance on the X axis

Eliminate- Do you need these functions?
Strategic alliance- Need a trusted partner and buyers must keep some control because these function are strategically important (but do not contribute much)
Outsource- Operational importance but low strategic importance
Retain in house- Core business functions to remain in house

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19
Q

What sorts of examples of functions can be outsourced?
(Think about Ocado as an example)

A

These are non-core activities-

IT
Catering
Maintenance
Cleaning
Marketing
Social Media
HR
Accountancy/payroll

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20
Q

When might you insource?

A

Insource is the process of bringing a function back in house that was previously outsourced

Happens if:
Outsourcing was ineffective
A period of time/ review period has elapsed
Strategy has changed

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21
Q

What are the risks of outsourcing?

A

Loss of control
Supplier reliance
Confidentiality- may need an NDA (think about ORL and M&S or ORL and WTR)
Quality
IP
Reputation (thing about 3rd party bike riders at Zoom)
Loss of technology and expertise
Inflexibility- usually have an SLA and long term agreement
International challenges- language, timezone, culture
Single source vulnerability- if you use only one supplier to outsource

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22
Q

What is TUPE regulation?

A

Transfer of undertaking, protection of employment- it is part of employment law

Protect the rights of employees where work they were employed to undertake is transferred to a new business

Way to think about this is if M&S bought ORL then the staff at ORL would still have the right to do the job/function they were hired to do.

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23
Q

What is the ILO and what do they do?

A

International labour organisation

Role is to protect global workers and ensure acceptable working conditions are maintained

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24
Q

Which factors may influence sourcing approaches?

A

Culture
Cost
Quantity of product
Category of product
Skill required
Supply & Demand

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25
What is the difference between single, dual, sole and multiple sourcing
Single- Buying from one supplier Sole- There is only one supplier available in the market (e.g. due to a patent) Dual- Two suppliers responsible for supplying all the needs for an item (often critical items where there is risk of supply) Multiple- many suppliers responsible for supply. Maybe where there is a lot of competition, but the relationship is not critical
26
What are the benefits and drawbacks of single supplier sourcing?
ADV: - One supplier has all the volume so can provide economies of scale - Can build a strong relationship and commitment and communication - Can support innovation and NPD - High trust DISADV: - Risk of failure of supply - Price may inflate if theres no competition - Low options - Reliance on one supplier
27
What are the benefits and drawbacks of dual/multiple supply?
ADV: - Lower risk - Continuous supply - Easy to drive down cost - Wide knowledge pool DISADV: - Transactional relationship - Lower supplier commitment - No economies of scale - No supplier loyalty/ collaboration
28
What are the generic steps in a tender process? PIACI
Planning Invitation Award Contract Implementation
29
What are the types of approaches with tendering? ORNCIC
Open- Widely advertised, expected lower interest from suppliers, allows any supplier to bid. Can sometimes be a pre-screening process for interest and then those suppliers are invited to ITT. Restricted- Advertise to interested suppliers to respond with an interest. The interested suppliers fill in a PQQ to see if they meet required criteria and then the full tendering is sent. So it is a two stage process. This is where there is expected to be high interest Negotiated- Similar start to restricted. However, it likely involves either a single supplier or a small group of capable suppliers due to a complex need. Normally, this is a supplier previously used or with a track record. However, it does lack competition so can make desired outcomes difficult. Can also foster complacency with using the same supplier. Competitive tendering- Suppliers are invited to submit bids for a package of work. Fosters competition, less bias, understand capabilities of many suppliers, high likelihood of finding an appropriate supplier. However, if you want it to be fair it will not be fast, it could also encourage the wrong types of supplier behaviour. Innovation partnership Competitive procedure with negotiation
30
What is a negotiation and what are the 5 styles?
Communication between supplier and buyer to try and get the best value solution for the supply of goods or services 5 outcomes: Compete- buyer wins Collaborate- Both win Avoid- both lose Accommodate- supplier wins Compromise- neither win or lose
31
What are the 4 stages of a negotiation? PINC
Preparation- where to negotiate, what outcome do you want, what are the styles, which issues could be raised, what is the back up plan Information exchange- listen and present info and requirements Negotiation/Bargaining- exchange, concessions, alternatives and terms Closing- agreement, contract created and signed before being mobilised
32
What is a PQQ and when is it used?
Pre qualification questionnaire- sent to potential suppliers to find out there suitability to be included in any procurement processes Focuses on: Financial stability- e.g. credit ratings, financial capability Accreditations- e.g. quality, labour standards Capacity- e.g. enough skilled labour, available staff, transport Ethical/sustainable practices- awareness and accreditations
33
What are Carters 10 C's?
Understanding the 10 C's will allow a procurement professional to decide suitability of a potential supplier: Competency Capacity Commitment (to quality) Cash Cost Consistency of delivery Culture Clean Communication Control of process
34
What is quality assurance?
In the specification there will be a detailed description of the quality required. Quality assurance are the systematic processes that together have the effect of preventing mistakes in the manufacture of a product or service
35
How can you evaluate how quality is managed by a potential supplier?
- ISO9001 accreditation - Continuous improvement- ongoing process - TQM- total quality management- organisation wide efforts to improve process, product and service. TQM is part of continuous improvement. Potential suppliers can demonstrate they have robust policies in place to satisfy the requirements of quality
36
What are the CIPS steps for continuous improvement?
This is about constantly looking for ways to improve processes 1) Map process workflows and identify improvement opportunities 2) Plan how the existing process can be adapted 3) Action the allocated resources to implement change 4) Review the implemented changes- are they providing the expected benefits 5) Identify and amend before going back to step 1
37
What are the elements of TQM?
Focus on consumer Continuous improvement Quality Improvement Accurate evaluation Involve all employees
38
What is the difference between ESG and CSR?
Procurement want to work with suppliers that are environmentally aware and sustainable. CSR is more focussed on the overall big picture of organisations values and goals. This is about the organisations sustainability frameworks to embed into strategy ESG are more measurable. It may include financial performance e.g. a sustainable credit rating, labour standards
39
What are the main criteria that can be looked at when selecting a sourcing supplier?
Compiling a full list- use a PQQ, carters 10 Cs Quality Assurance- ISO, TQM, continuous improvement ESG- e.g. labour standards Technical capabilities- using samples, compatibility of systems Financial capabilities- credit check
40
What happens if a supplier does not meet the criteria in a PQQ?
After the PQQ you may conduct site visits, request detail on policies or get samples. Ultimately, if they do no pass the PQQ they will not be added to the short list who will receive the ITT or RFQ.
41
What issues would an organisation face if they do not conduct the PQQ and appraisal process properly?
Poor quality Breaches of contract Environmental damage Financial concerns Failed deliveries Ethical concerns Stakeholder dissatisfaction Reputational damage
42
What is due dilligence?
The process of ensuring that a prospective supplier is who they claim to be and are capable of delivering the services to the required standard
43
What are some of the impacts if a supplier is financially unstable?
Delay or failure to supply Inability to invest Dependency on the buying organisation
44
How can an organisation carry out a financial review on potential or existing suppliers?
Profit/loss account/income statement- effectively, in a private company can they make a profit Balance sheet- Shows financial position at a certain point in time showing liabilities, assets, equity Cash flow statement Chairmans statement
45
What is an income statement?
This is the same as a profit/loss statement and summarises revenue, costs and expenses that have occurred within a financial statement period. Gross profit = Revenue - cost of sales
46
What is shareholder equity?
The owners residual claim once all debts have been paid Amount of assets - amount of liabilities = shareholder equity
47
What is a cash flow statement? Which 3 activities contribute to the cash flow of an organisation?
Show how cash has been generated and spent during an accounting period Operations- materials, sales, salaries, taxes investing- Interest received, loans Financing- payments to shareholders
48
What is a ratio analysis and what is used to calculate it?
A method to quantify a company's liquidity, operational efficiency and profitability to evaluate its performance over time. It uses: Profitability ratios: Profitability over time Liquidity ratios: does an organisation have assets which could meet its liabilities if required Gearing ratios: looks at how an organisation is funded by looking at its borrowing vs its equity. High gear - high risk as a supplier has long term and high cost debt
49
What criteria could you use to award a supplier with a contract?
Price WLAM Technical merit Added value solutions ESG Ethical
50
When reviewing price, which elements could be included and should be considered to understand the offer and carry out a fair analysis?
Rebates Discounts on payment terms exchange rate Batch quantities quoted for Delivery Taxes Conditions of payment Pricing mechanism- is it cost plus TCA- price, transport, packaging, insurance, installation
51
Which costs are included in WLAM?
Acquisition Tooling Insurance Operating Maintenance Training Storage Disposal
52
What elements of a proposal could be considered as added value?
These are things that do not cost the buying organisation money but generate value within a contract. They just make a supplier more desirable to work with Innovation OTIF Relationships Lead times Improved quality Support Reputation
53
Which elements of a proposal could be considered as ESG?
This is an organisations impact on the environment, people and governance of the peoples values and behaviours Sustainable sources e.g. FCS (Forest stewardship council) packaging SC does not negatively impact environment and is circular where possible Aim to reduce emissions Social value How are products delivered both to the supplier and the buyer This can be done through documents such as a code of conduct, CSR policy, ED&I policy
54
What is a code of conduct?
Rules set out by an organisation that define suitable behaviours and values that should be applied to behave in a suitable manner, demonstrate uniformity and uphold standards
55
Which elements of a proposal could be considered as ethical criteria?
Ethics are the moral compass and reflects actions to 'do the right thing' Accreditations e.g. CIPS, ILO, Carbon Trust Codes of ethics SC visibility Internal training Behaviours around confidentiality Note- there should not be a scenario where a buyer is demanding of ethical criteria that they could not themselves uphold.
56
What is a professional register?
A list held by an awarding body that documents all individuals and organisations who are members or hold an accreditation
57
What is the difference between technical and commercial criteria?
Technical is whether the supplier can actually produce and supply something so would cover: Specification Delivery Quality Commercial criteria are focussed more on organisational fit: Cultural fit Ethical standards Sustainability Everything needs to be considered before making a decision.
58
How can due diligence be carried out on a supplier?
Ask the supplier to provide information Visiting the suppliers premises Carrying out desk research
59
What areas are found in a financial statement? (from LO2, p71)
Income statement/profit and loss account Balance sheet- shows equity, assets liabilities Cash flow statement
60
What is sourcing?
Sourcing is the location, acquisition and management of the vital inputs required for an organisation to operate. Includes raw materials, component parts, products, labour and in all its forms, locations and services This is the book definition, word for word
61
What 4 elements make up the make or buy decision/ outsourcing?
The product or service (how vital is it- Kraljic, pricing strategy of the organisation) The organisations current position (sourcing matrix AKA strategic importance) Market situation (porters 5 forces, STEEPLED) Competition (monopoly etc)
62
What are the benefits and disadvantages of intra company trading? p.10 of guide
Adv - Global tax bills can be reduced - Simplifies internal accounting - Entire organisation has the same/fixed price - Divisions can therefore easily evaluate spend - No physical money needs to be transferred Disadv - Some country economies can be negatively affected - Strict tax monitoring - Sourcing locally may be more cost effective - Negative impact on the local economy - Could create internal competition
63
What is CLAN and what is SCAN?
Centre led action network- center decides policy and applied to regions Strategically controlled action network- center sets strategy and has some control in local markets
64
What are the risks in outsourcing? (hint, there are 10)
Loss of control Supplier reliance Confidentiality Quality IP Reputation Loss of tech, innovation or expertise Inflexibility Cultural differences Single source
65
What is TUPE and what are the benefits?
Regulation to ensure fair treatment of employees Transfer of undertakings (protection of employment) in the UK Adv: - Continuity of supply for the buyer - Continued employment for the workers - ILO- promotes fair working conditions, rates of pay, social protection etc - Protects global workers - Regulates acceptable working conditions
66
What is the ILO and what do they do?
International labour organisation Regulations relating to: - Acceptable working conditions - Fair working conditions - Acceptable rates of pay - Social protection
67
Which 2 matrix would you use to identify of a product is core to an organisation?
Critical to the output 1) Kraljic matrix 2) Outsourcing matrix
68
How do you assess the market situation?
Porters 5 forces
69
How do you assess competition?
Perfect competition Imperfect competition Monopoly Oligopoly Dualopoly
70
What is perfect competition? What is imperfect competition?
Perfect: A market where there are no monopolies Imperfect: Competition is low resulting in market inefficiencies
71
What would be used to assess the cultural differences between organisations?
STEEPLED
72
What are the 5 outcomes of a negotiation (3 C's, 2 A's)
Collaborate (win win) Compete (buyer wins, supplier loses) Compromise- meet in the middle Accommodate (supplier wins, buyer loses) Avoid (lose lose)
73
What are the typical selection criteria?
Quality assurance ESG Technical capability Systems capability Financial Capacity Skills
74
What are the 4 elements of outsourcing/ make or buy?
The product or service (how vital is it- Kraljic, pricing strategy of the organisation) The organisations current position (sourcing matrix AKA strategic importance) Market situation (porters 5 forces, STEEPLED) Competition (monopoly etc)
75
What are the 3 key elements of the financial stability of an organisation?
Profit and loss statement- summary of income earned and expenditure over a period of time Cash flow- sources of cash coming in and how it is spent Balance sheet- assets you can sell to meet liabilities
76
5 factors affecting commodity pricing?
Supply/ Demand- seasonality Currency Political situation Conflict Force majeure
77
What is liquidity?
Are you able to meet liabilities (short term debts) when they come due from current assets?
78
What is gearing?
A measure of how a business is being funded by comparing equity to debt (inc quality or cost of debt)
79
What is the difference between a profit and loss statement, a balance sheet, a cash flow statement and a chairman's statement?
Profit and loss statement- aka income statement and summarises revenues, costs and expenses over a financial period (think about the MSC sessions with finance) Balance sheet- Gives financial performance at a particular point in time and shows assets, liabilities, equity or shareholder funds Cash flow statement- Shows the amount of money that came in and went out over an accounting period. Has the aim of demonstrating how well a company is managing cash and payments its creditors Chairman's statement- a report by a company's chairman once a year that gives information to shareholders about the company's performance during the past year
80
How do you calculate shareholder equity?
Shareholder equity is the remaining claim of the owner/organisation once debts have been paid Assets - liabilities = Shareholder equity
81
What is a ratio analysis?
A method of quantifying an organisations liquidity, operational efficiency and profitability to evaluate its performance over time vs others
82
What are the three types of ratio analysis (in the guide p44)?
Profitability- Has the organisation traded profitably over a period of time? Liquidity- Does an organisation have sufficient assets to meet its liabilities Gearing- Cost and quality of an organisations borrowing vs its equity
83
What is an acid test ratio?
A financial ratio that assesses if an organisation has sufficiency cash/assets to meet its short term liabilities
84
What is the difference between selection criteria and award criteria?`
Good way to remember is selection criteria assess the bidder but award criteria assess the bid
85
What is another name for an income statement?
Profit and loss account Documents revenues, costs and expenditure over a financial period
86
Which financial statement would be best to understand shareholder equity?
Balance sheet as it shows assets, liabilities and equity at a certain point in time
87
What is a ratio analysis?
A way of quantifying a company's performance over time 1) Profitability 2) Liquidity 3) Gearing
88
What is an acid test?
A method to gauge whether an organisation has enough short term assets to cover immediate liabilities

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