CONTEXTS OF PROCUREMENT AND SUPPLY CIPS DIPLOMA LEVEL NOVEMBER EXAMINATIONS 2017

Transcription

1 CONTEXTS OF PROCUREMENT AND SUPPLY CIPS DIPLOMA LEVEL NOVEMBER EXAMINATIONS 2017 Lean Procurement 2017

2 Session 1 Agenda for the day Welcome Students Handbook Induction CIPS Structure D1 Contexts of Procurement & Supply Content Learning Outcome 1 Homework

3 Level 4 General Overview Diploma in Procurement and Supply Focuses on organisation procedures and processes including negotiation, planning, risk management and data analysis

4 Level 4 General Overview Diploma in Procurement and Supply Broken down into five modules, all require pass to progress to Level 5:- Contexts in Procurement and Supply Business Needs in Procurement and Supply Sourcing in Procurement and Supply Negotiation and Contracting in Procurement and Supply Managing Contracts in Procurement and Supply

5 Level 4 General Overview Diploma in Procurement and Supply Award after completion of Level 4 Diploma Member Point of note:- Certain topics overlap, such as:- Kraljic matrix can be found in Sourcing, Negotiating and Relationships Financial reporting and data analysis found in Sourcing and Negotiation Many contract terms found in Negotiation and relationships

6 Unit Content Contexts of Purchasing and Supply Purpose and aim of unit Offer advise and guidance to main stakeholders on the application of the sourcing process Understand supply chains which organisations operate in 4 Main Learning Outcomes in Module 1. Understand the added value that can be achieved through procurement and SCM 2. Understand the stages of sourcing processes in creating added value outcomes from supply 3. Understand the main aspects of organisational infrastructure that shape P & SC function 4. Understand the need for compliance with requirements when undertaking procurement activities in different sectors Breakdown 1. Looks at what can be purchased, how it benefits the company and who is involved 2. Looks at how purchases are made and the benefits it has on the company 3. Looks at internal controls of P & SC along with different structures and IT systems 4. Looks at external controls of P & SC in the public, private and third party sectors

7 Chapter 1- Categories of Procurement Assessment criteria and indicative content 1.1 Explain the categories of spend that an organisation may purchase Definitions of procurement and purchasing and supply (1.1a) Typical breakdown of organisational costs from goods, services and works (1.1b) Stock and non-stock procurements (1.1c) Direct and indirect procurements (1.1d) Capital purchases and operational expenditures (1.1e) Services procurements (1.1f) Refer to your planner for guidance in these sections

8 OilCo Ltd Case Study Overview OilCo Ltd is a company that was formed in 1978 that specialises in the submersible rigs and vessels. They manufacture and manage a fleet of five rigs and twelve vessels globally including a presence in the North Sea Continental Shelf (NSCS). The company has seen tremendous growth since its inception and employed over 200 people in each of their locations in Aberdeen, Houston, Dubai and Shanghai. In 2016 their revenue increased to 24.3 Million which bucked the trend of the global oil and gas downturn. Profits also increased to 7.6 Million. However, due to the continuing market constraints and an oversupply of capacity OilCo Ltd are under increasing pressure to sustain this growth and are now looking to their Procurement and Supply Chain function to add value along with reducing risk within the organisation.

9 OilCo Ltd Case Study Procurement v Purchasing (1.1a) An audit was undertaken within OilCo s procurement and supply chain (P&SC) function and the following highlights were discovered:- Planning was extremely weak where the organisations five buyers first realisation of procurements was when the PR hit their department The P& SC function had no input into the design or identification of the specification The same level of relationships were used for all suppliers and were dealt on a one off transactional basis PO s were placed solely on price with very little consideration for other criteria The company were using suppliers with low ethical standards in low cost countries The same suppliers were being used under the same specification for the last ten years Nearly all of their goods and services were purchased to satisfy a single demand

10 OilCo Ltd Case Study Procurement v Purchasing (1.1a) An audit was undertaken within OilCo s procurement and supply chain (P&SC) function and the following highlights were discovered:- Planning was extremely weak where the organisations five buyers first realisation of procurements was when the PR hit their department The P& SC function had no input into the design or identification of the specification The same level of relationships were used for all suppliers and were dealt on a one off transactional basis PO s were placed solely on price with very little consideration for other criteria The company were using suppliers with low ethical standards in low cost countries The same suppliers were being used under the same specification for the last ten years Nearly all of their goods and services were purchased to satisfy a single demand

11 OilCo Ltd Case Study Procurement v Purchasing (1.1a) From this audit it was very apparent that the company were using the traditional Purchasing approach which hasn t changed since the company was created in the 1970 s. The following actions were put into place and follow the Procurement approach. A full assessment needs to be carried out to identify opportunities that includes hiring, leasing, outsourcing, make/ buyer their high cost items and not just focus on straight purchasing Activities moving away from the basic Purchase to Pay (P2P) needs to be introduced which includes:- Engaging with the end-users at design/ need identification stage Assessing the market for sourcing opportunities and innovation Supplier relation management and development Structured negotiation Formalised contracts and contract management Direct linkage into corporate and strategic objectives

12 Procurement v Purchasing (1.1a) In summary:- Reactive v Proactive Tactical v Strategic Narrow View v Broader View

13 Typical breakdown of organisational costs from goods, services and works (1.1b) History of Procurement Why has the function developed to the extent that it has globally and in the UK? Decrease in manufacturing in the UK Largest cost used to be wages little procurement involvement Increase of automated production processes in remaining manufacturing Focus on core activities and increase in outsourcing All of this has led to an increase in external spending

14 Typical breakdown of organisational costs from goods, services and works (1.1b) It is important to separate the three main different types of procurements due to:- The difference in contract law (Sale of Goods Act/ Sale of Goods and Services Act) Management of the different types of areas of spend (category) The three types are:- Goods - Tangible/ material items that can be consumed Services Actions individuals/ organisations perform that results in a benefit (no ownership) Constructional works Project based and includes maintenance, repair etc

15 Typical breakdown of organisational costs from goods, services and works (1.1b)

16 Typical breakdown of organisational costs from goods, services and works (1.1b)

17 Typical breakdown of organisational costs from goods, services and works (1.1b) Erridge & Hutchison Average % spend by departments and agencies in central government procurement:- 34% - Goods 41% - Services 13% - Capital Works 12% - Other (research, property rental and telecommunications) Over half stated an increase in spend over a three year period This is why Procurement and Supply Chain is becoming more important!

18 Direct and indirect procurements (1.1d) Another way to classify procurements is direct and indirect :- Direct procurement - Items procured for resale or for incorporation in goods for sale Indirect procurement - Procurement of any other items (e.g. running and ancillary items) But why make a differentiation between the two? Quality of direct procurement has a direct impact on the quality of goods produced Direct procurement materials often held in stock (high risk to business with stockouts) Direct procurement more likely to be over longer term and cost more Direct procurement is likely to be involved due to complex contract requirements)

19 Direct and indirect procurements (1.1d) A similar way of viewing direct/ indirect procurements is the Porter s value chain Make the distinction: Support activities mainly utilise indirect procurements Primary activities mainly utilise direct procurements

20 Direct and indirect procurements (1.1d) Different types of categories of direct procurement Production materials Raw materials items extracted from the ground; minerals, fruit & veg etc Components and assemblies finished items (outputs for one), inputs for another Work in progress part finished outputs that is not ready for sales to customers Points of note:- High quality goods are required, high costs if not procured correctly Should we make these goods or buy them in? High need for cross-functional collaboration Possibility for EBI and ESI (early buyer/ supplier involvement)

21 Direct and indirect procurements (1.1d) Different types of categories of direct procurement Commodity procurements Items occurring in nature; gold, coffee, tea, coal etc Can be viewed as being similar to raw materials Bear in mind that the previous section was thatthe materials were for production Items can be viewed both as a commodity and a raw material Points of note:- Source of the items can be worldwide with many variables attached Nearly always subject to large fluctuations in the marketplace Buyers need to monitor these changes closely to get the best deal Trend to buy when prices fall and sell when prices are high Often real commodity buyers are extremely experienced in the marketplace

22 Direct and indirect procurements (1.1d) Different types of categories of direct procurement Goods for resale Occurs often in retail, wholesale and brokerage Very little work done on them from one side of the chain to the other Added value achieved by price, packaging, sale/ return and customer service Quality control, service levels and supplier relations are important Points of note:- Usually very little margins wholesalers and retailers are working with Large range often sought by customers from different manufacturers, e.g Argos Buying against supplier specifications (rather than what the buyer wants) Quick feedback into what is successful within the market Products usually of low technical complexity

23 Direct and indirect procurements (1.1d) Different types of categories of indirect procurement MRO Supplies (Maintenance, Repair and Operational) All goods and services other than capital equipment in the transformation of goods Repeated supply with large range of products Potentially low usage for each product High potential for large stock costs Cost of item v cost of not holding the item Points of note:- Large range of demand levels and may need to be grouped Range of products ideal for catalogues Large opportunities for rationalisation System benefits with stock movements Slow moving stock to be monitored and potentially adjusted Manufacturers may push their own maintenance parts; e.g warranties etc

24 Direct and indirect procurements (1.1d) OilCo Ltd Case Study Exercise 1 List four possible examples of the following that the company may procure:- Production materials Commodity procurements Goods for re-sale (be creative!) MRO supplies OilCo Ltd Case Study Exercise 2 Kelly Wylie is the Procurement and Supply Chain Manager for OilCo Ltd. Up until now all the PR s coming into the department were allocated to whoever of the five buyers had the time and were available. What are the disadvantages of using this approach in terms of direct and indirect procurements?

25 Stock and non-stock procurements (1.1c) QQ Why hold stock in the first place? Stock for Production Non-stock procurement/ Procurement for production - procurement only when immediately needed for production Procurement made directly on the back of customer orders Important component of JIT Reduced need of stockholding QQ What are the main costs of holding stock? Methods to reduce stockholding costs techniques include:- Use of EOQ Improving demand forecasting to enable stockholding Use of vendor managed inventory Use of MIS to support inventory management

26 Stock and non-stock procurements (1.1c) Stock to order A non-stock procurement policy Procurement used to put materials into stock directly associated for customer orders Popular with jobbing, i.e. house construction, furniture and high end car production Important for suppliers to keep to deadlines Stock to forecast Estimates made for future products and supplies Constant checking of current stock and balancing lead times very important Estimates can be done on past orders, statistical techniques and current sales figures

27 Stock and non-stock procurements (1.1c) Stock Procurements/ stock for inventory (similar to stock to forecast) Occurs when there is no definite demand at present Can happen when:- There are independent demand situations Stable/ predicted demand for low value/ non perishable items Where there is a long lead time Items are important for operations Where there is a legal requirement to hold stocks Inventory appreciates over time Where prices are expected to rise When demand fluctuates and is hard to predict Perishable goods Goods that only have value before they perish; e.g. food and drink products Use of sell by and use by dates Specialised transportation and storage often required Careful regulations of such products. E.g. frozen meat to only be transported at a specific temperature

28 Stock and non-stock procurements (1.1c) OilCo Ltd Case Study Exercise 3 Due to the reactive nature of the present working practices of the company the company only holds stocks of workshop consumables. Everything else is procured to order when the company received a commitment from client. There has been issues with this policy for some time as some of their suppliers, notably original equipment manufacturers (OEM) have very long lead times on their items such as engines and winches for OilCo s vessels. Identify the variables that the company needs to take into account when assessing a stock holding policy decide whether to change their policy to consider stocking these items in their inventory and also consider any other alternatives. Also consider the context of the current Oil and Gas industry regarding stocking policies during the present downturn.

29 Capital purchases and operational expenditures (1.1e) Important to know the differences between Opex (e.g. MRO purchases) and Capex Capital Goods Total Cost of Ownership Generally High Complex Negotiation One-Off Complex Specification High Benefit and Risk MRO Items Purchase Price Generally Low Basic Negotiation Recurring Simple Specification Low Benefit and Risk

30 Capital purchases and operational expenditures (1.1e) Evaluating and justifying capital procurement options Feasibility study is often required Components include purchase price, length of usage, delivery, installation and maintenance Overall total costs can be difficult to fully measure Future cash-flows need to be taken into account Calculating DCF will lead to the NPV (i.e. 10 is of higher value now than in 10 years) Cost/ benefit analysis can be conducted:- <1 Benefits less than cost >1 Benefits greater than cost =1 Benefits equal the costs Payback period the length of time taken to pay back the costs After calculation business case needs to be prepared

31 Capital purchases and operational expenditures (1.1e) ADVANTAGES OF OUTRIGHT PURCHASE Total cost is low, compared to rental The user has total control over the use of the asset The asset may have residual re-sale value at the end of use Capital allowances may be set against tax, and government grants may be available DISADVANTAGES OF OUTRIGHT PURCHASE High initial expenditure ties up capital User bears all costs and risks of maintenance, operation and disposal Risk of technological obsolescence Wasteful, if equipment is needed only for a short period (e.g. a particular project)

32 Capital purchases and operational expenditures (1.1e) ADVANTAGES OF LEASING No initial investment to tie up capital Protects against technological obsolescence Costs are known and agreed in advance Fewer complex tax and depreciation calculations Hedge against inflation DISADVANTAGES OF LEASING Long-term commitment to pay instalments User does not have total control of asset Total cost may be higher than purchase Large organisations may get better terms by securing their own finance to purchase Contract terms may favour the lessor

33 Capital purchases and operational expenditures (1.1e) How can procurement make a difference in capital decisions? Many functions likely to take part in activities such as:- Research into possible vendors Requesting quotations and evaluating bids Organising and managing communication and discussions Negotiating with suppliers and awarding the contract Checking suppliers compliance Monitoring installation and post installation performance Working with the manufacturer How can procurement make a difference in operational decisions? Stock levels Process costs Consolidation of supply Standardisation

34 Capital purchases and operational expenditures (1.1e) OilCo Ltd Case Study Exercise 3 Kelly has decided to change the roles and responsibilities of one of her buyers to Concentrate solely on capital procurement (Capex). This also includes the assessment of investigating areas where there can be possible leasing and rental opportunities from the recent audit. There are three large projects on the horizon which include:- The possible relocation of new premises in China due to company growth An imminent order for the purchase of a new vessel The introduction of a new ERP system Firstly, Kelly will need to consider what is actually capital procurement in the first instance. Consider the criteria that Kelly will need to apply to establish this. Secondly, Kelly will also need to select who the Capex buyer is within her department. What skills will Kelly need to focus on during this selection process. Currently there is no budget in the yearly plan to recruit more personnel externally.

35 Services procurements (1.1f) How are goods and services different? Intangibility (lack of inspectability etc) Inseparability (services are produced and consumed at the same time) Heterogeneity or variability (every service is different) Perishability (cannot store) Ownership (ownership isn t transferred) Measures of service quality Can be used as Service Level Agreements Tangibles (even in a service), e.g. aesthetics Reliability (ability to perform the service) Responsiveness (how keen is the supplier wiling to help and respond quickly) Assurance (is the customer confident the provider to do the service well) Empathy (ability to identify with the customer needs)

36 Services procurements (1.1f) Monitoring of service levels Observation and experience (logistics experiencing a suppliers delivery performance) Spot checks and sample testing (e.g. flash inspection on a cleaning service) Business results and indirect indicators (e.g. performance of an inspected valve) Customer and user feedback (e.g. surveys/ questionnaires) Electronic performance monitoring (e.g. tracking systems on delivery vehicles) Self-assessment by the service provider (e.g. signed inspection documents)

37 Services procurements (1.1f) Outsourcing The purchase of a service for goods/ services that were carried out/ manufactured Internally previously Requires a long term collaborative relationship Increase in popularity so organisations can focus on their core business

38 Services procurements (1.1f) ADVANTAGES OF OUTSOURCING Supports organisational rationalisation and downsizing Allows focused investment of resources on core competencies Gives access to specialist expertise, technologies and resources of contractors Access to economies of scale Adds competitive performance incentives DISADVANTAGES OF OUTSOURCING Potentially higher cost of services, contracting and management Difficulty of ensuring service quality/consistency and CSR Potential loss of in-house expertise, knowledge, contacts or technologies in the service area Potential loss of control Added distance from the customer or enduser Risks of lock in to an incompatible or underperforming relationship Risks of loss of control over confidential data and intellectual property

39 Services procurements (1.1f) OilCo Ltd Case Study Exercise 3 OilCo has, for a number of years, been experiencing issues with their procurement of services. This has been evidenced from:- A much higher than average number of invoices failing to be matched with the service PO Many NCR s raised on service providers due to lack of quality on some of their service, especially one particular supplier that carries out inspection activities on the company s vessels. This has resulted in re-inspection and loss of reputation to the company The availability of third party personnel, especially rope access providers needed quickly at short notice required for the company s submersible rigs offshore The company has decided to implement SLA s into their main service provider contracts and start measuring the performance of these suppliers. Create five general SLA s that the company can integrate into these contracts.

40 Services procurements (1.1f) Homework a) Explain, with examples, the characteristics of each of the following purchasing categories: Commodities Goods for Resale Maintenance, repair and operating (MRO) supplies. (15) b) Outline FIVE circumstances where buying for stock would be an appropriate procurement policy (10) CIPS Examination Tips of_%20dip_v2.pdf Password for Lean Procurement Website Downloads - Mysterytour