BUSINESS NEEDS IN PROCUREMENT AND SUPPLY CIPS DIPLOMA LEVEL JANUARY EXAMINATION 2018

Transcription

1 BUSINESS NEEDS IN PROCUREMENT AND SUPPLY CIPS DIPLOMA LEVEL JANUARY EXAMINATION

2 Session 1 Business Needs and Procurement Decisions 2

3 Welcome Course Structure 10 Classes 8 ½ Revising and summarising course material 1 ½ Dedicated study tsessions Class Structure What you need to do before the class even starts:- 1. Read Chapter material so you can come to the class prepared with any queries and questions (check planner for chapters) 2. Answer all short questions from previous Chapter 3. Attempt all homework Makes class time much more productive! 3

4 Welcome Rules for CIPS Club 1. Do not be put off by the 193 page Study Guide 2. Relate as much as you can to your work experience (and previous CIPS modules) 3. Always try and discover what the material is trying to achieve 4. Focus on concepts rather than detail 5. Start studying right from the beginning, slow and steady 4

5 Starter questions and indicative examination content Q1 A) Using examples, explain the difference between direct and indirect costs (5) B) Describe FIVE factors that a buyer might expect a supplier to take into account when setting the selling price of their product (20) Q2 A car manufacturing company is preparing a business case for the purchase of a new machine, to be used in the assembly of vehicles. A) Describe FOUR commercial benefits that might be used as criteria to justify the business case (16) B) Describe ONE cost and ONE risk that could be included in the business case (9) 5

6 Homework (a) Define the term total lifecycle costing (5 marks) (b) Describe FIVE costs that should be considered when calculating the lifecycle cost of an item, apart from the purchase price of the item (20 marks) 6

7 Study Guide Structure Course objective:- To gain an understanding of practices that will help achieve value for money solutions in procurement Four learning outcomes:- 1.0 Understand how to devise a business case for requirements to be sourced from external suppliers 2.0 Understand the fundamentals of specifications and key performance indicators that are included in contractual arrangements made with suppliers 3.0 Understand the main clauses that are included in formal contracts 4.0 Understanding the main implications of outsourced work or outsourced services for the procurement 7

8 Chapter Analyse how business needs influence procurement decisions 8

9 Introduction QQ What exactly is a sourcing exercise? Have you been involved in one? How does a company know for sure that a particular sourcing exercise is worth it? What are the potential costs/ benefits? This chapter looks at the connection between business needs and procurement decisions How does one effect the other? Business case sections looks at justification of how procurement actions can meet the needs of the business Chapters 2 & 3 looks at the financial parts of the business case 9

10 Lean in Aker unveils new semi-sub design, November 1, 2016 Aker Solutions has unveiled a new, low-cost semi-submersible rig design for marginal field development. As marginal field development becomes a more serious concern for operators and engineers, new innovation in the rig market is beginning to reflect the changing concerns of the industry. With day rates and utilisation so low, many rigs, whether semi-submersible or jack-up, can be overdesigned and over-equipped for the jobs they need to do. This has already been seen in the intervention market, where newer and more capable vessels are replacing costlier work-over rigs. Marginal field development has, so far, been restricted to subsea tie-backs to nearby existing infrastructure. However, as these marginal fields are beginning to take priority in the UK and Norwegian continental shelves especially operators are after efficient solutions for field development, which can maximise production at minimal cost. A number of initiatives have already been introduced for fixed platforms such as subsea on Slim Legs (Statoil), Subsea on a Stick (Kværner), and STEP (Det norske and Aker Solutions). However, a new approach has been suggested by Aker Solutions. Its latest Lean Semi design is intended to help bring fields of up to 300 million barrels of oil equivalent on stream. Suitable for water depths of m, it is lighter, cheaper and faster to produce than other semi-subs on the market. Lean if you want to go faster Aker embarked on the rig design tasked with achieving a 60,000 bpd production capacity with reduced investment and hire costs. The topside itself weighs around 6,000 metric tonnes making the Lean Semi up to 30% lighter than comparable rigs and has a displacement of 22,500 tonnes. The platform design uses a combination of elements from two proven designs for the North Sea and the Gulf of Mexico and is the result, the company says, of a painstaking review of every single platform item. 10

11 1. What are business needs (1.1b) Inputs Process Outputs Inputs Process Outputs Purchasing is to satisfy the inputs Sometimes called the Five Rights of Purchasing Right price Right place Right time Right quality Right quantity Functional/ Department objectives 11

12 1. What are business needs (1.1b) Profitability Competitive advantage Cost leadership Differentiation Employ and work with the best people Strategic & Commercial Objectives (important to know the connection!) Changing role of procurement Less labour costs through procurement = higher proportion of purchasing spend World class manufacturing methods, e.g. Just in time Move towards closer and strategic partnerships with suppliers Passive Independent Supportive Integrative 12

13 1. What are business needs (1.1b) Therefore, there is more focus on strategic and commercial objectives rather than only operational and functional objectives (although these are still very important!). Can include the following:- Bottom line profit Addition of shareholder value VFM solutions Cash-flow maximisation Competitive advantage/ market-share/ CSR Business Needs and Business Case Business Case Assessment of potential benefits against risks/ costs Should be:- Able to demonstrate how they contribute to the commercial and strategic obj. Managed in a way to maximise their contribution 13

14 2 The procurement cycle (1.1b) 14

15 2 The procurement cycle (1.1b) Cycle Business needs change constantly, cycle requires reviewing QQ What can change in the business that needs the cycle to be reviewed? Business needs to be adhered to at each stage:- Supplier management and appraisal Contract terms and conditions Risk mitigation Business priorities and criteria at the time (price, quality etc) Best stage to develop business case is at the early stages of identification of sourcing inputs. Doing this later on will run the risk of:- Waste of procurement (and other) time and effort (e.g. stock requirements) Over specification Loss off control Sourcing effort may be wasted (rejection of suppliers/ specification ) PLAN PLAN PLAN! 15

16 2 The procurement cycle (1.1b) Module looks at stages (Chapters 4 8):- Identification Definition Communication of requirements Identifying needs Can be identified by:- User department Stores/ warehouse External (e.g customers) Requirement can be initiated by:- Requisition Bill of materials (BOM) in the case of MRP 16

17 2 The procurement cycle (1.1b) The purchasing department should not automatically accept the requisition, instead: Challenge the specification Challenge the sourcing (supplier selection) Challenge any pricing Challenge any unfavourable terms All of the above can be terms added value Defining Needs Identification and description of the need internal Detailed defined description of the need external Can include:- Specification Service level agreements Contract terms Key Performance Indicators 17

18 3 The procurement context (1.1a) Type of purchase Straight re-buy of items already sourced from supplier Modified re-buy item requirements have been changed New buy items have not been previously specified of sourced Straight re-buy Preferred suppliers may exist with contractual terms No need to establish specification or queries Justification of purchasing costs may not be required Business priorities:- VFM, Competitiveness of specification, continuity of supply, process costs Business needs can influence procurement decisions by suggesting the need:- To optimise inventory replenishment methods To review existing specification and arrangements To re-open existing long-term contracts to competition To secure additional business benefits in repeat or renewed contracts To conduct systematic value analysis of products 18

19 3 The procurement context (1.1a) Modified re-buy In event of the requirement changing:- The need may need to be respecified Business case justification of modification may be required Modification of requirement could be an opportunity for specification to be looked at Business needs may influence procurement decisions by stating the need or opportunity to:- Review existing specifications and arrangements Challenge modified specifications Re-open existing contracts to competition To justify specification or contract modifications To re-negotiate contract terms 19

20 3 The procurement context (1.1a) New Purchase In this context:- Buying activity will adhere more to the full, systematic purchasing process In depth business case justification is usually required New identification and specification of requirements can be a good opportunity Business needs may influence procurement decisions by stating the need or opportunity to:- Purchasing research (demand analysis/ vendor analysis & supply market analysis) Value engineering Early buyer involvement Early supplier involvement Develop specifications/ KPI s and contract terms 20

21 3 The procurement context (1.1a) Procurement Categories Capital procurements Priority business need:- Long life/ high costs/ high risk High degree of appraisal of benefits Detailed comparison of alternative assets or options Whole life costing (looked at more in Chapter 2) Negotiation, spec and contracting with chosen supplier Management and maintenance of the asset to maximise return Production Materials High priority business need:- Five rights Security of inputs 21

22 3 The procurement context (1.1a) Procurement Categories Maintenance, Repair and Operating (MRO Supplies) Procurement decisions priority could be to:- Avoid stock proliferation Creating stock levels Usage of catalogues and call-off contracts Opportunity to minimise prices Commodities (metals, textiles, crops etc) Priority to secure supply to minimise scarcity and supply disruption Costs and risks can be complex from international markets Forward buying Usage of commodity market tools 22

23 4 Developing a business case (1.1c) Business benefits included in the business case can include:- Increased revenue Reduced costs Higher profits Higher capacity/ capability Higher performance Business needs has to be benefits to the business as a whole (e.g not just technical) The business case process Strategic thinking > efficient decision making > evaluation > compare > benchmark > Expected returns > assumptions accurate > case justification still valid? 23

24 4 Developing a business case (1.1c) Contents of a business case Informal business case structure for low risk/ low value Introduction/ background Options Business benefits Costs and risks Recommendation KPIs (if data is available) Overview of the business need Priority of the need or issue (e.g. using Kraljic analysis) The current situation Options considered (if any), with reasons for rejecting or carrying forward each option Expected outcomes of the proposed solution, and their associated business benefits Alignment of the proposed solution with business objectives, strategies, policies and values Estimated costs of the proposed solution Anticipated risks of the proposed solution Anticipated impacts on activities and relationships Anticipated risks and costs of not pursuing the proposed solution (or doing nothing) Net (on-balance) cost/benefit assessment Return on investment or payback period (if data is available) Target costs and results which will be used to evaluate performance 24

25 4 Developing a business case (1.1c) Contents of a business case More detailed and complex business case required for high risk/ high value:- Executive summary and reference Context Value proposition Scope Deliverables Impacts 25

26 5 Criteria for business case (1.3a) Business Benefits Completion of business objective Increased revenues Reduced costs Higher profitability Higher VFM Higher shareholder value Competitive advantage Leverage of resources Higher capacity/ capability/ flexibility Improved brand/ reputation All of the above can be broken down into:- Added value Competitive advantage 26

27 5 Criteria for business case (1.3a) Added value The worth of the product or service What is costs How much the customer is prepared to pay for it Procurement can either:- Cut costs Secure operational efficiency A good business case should include at least one of the above Competitive advantage The ability to deliver value better than your competitors, such as:- Giving the same value but cheaper Giving a better product or other differentiator at the same price 27

28 5 Criteria for business case (1.3a) Costs Earlier benefits were looked at, costs also have to be considered (Chapter 2):- Financial costs Non-financial costs Opportunity costs Risks Risks will need to be included in the business plan:- Risks from the intended project Costs of those risk Balance of risks and benefits required Risks that may effect the anticipated benefits Risk assessments can be conducted:- Likelihood and severity of those risks Risks mitigation Contingency planning 28

29 5 Criteria for business case (1.3a) Cost/ benefits analysis If the benefits outweigh the costs it is feasible simple? Are the benefits always easily quantifiable? Cost/ time/ satisfaction etc? Direct costs quite easily quantifiable Indirect costs less so Opportunity costs even less! Intangible costs- environment, CSR, pollution etc Can be defined as a ratio:- < 1 benefits are less than costs rejection >1 benefits are more than costs proceed =1 benefits and costs are the same investigate further 29

30 5 Criteria for business case (1.3a) Cost/ benefits analysis Costs Computer equipment: 8 1,000 8, , Installation and technical support 1,800 Purchasing management software 3,200 1, Staff training: Introductory computing (6 people 200) 1,200 Purchasing management system (8 people 400) 3,200 Other costs: Lost time (20 person 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 10,000 Improved 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 30

31 5 Criteria for business case (1.3a) Options or alternative solutions Sometimes the solution has to be the best solution, not just better Is this always practical? Comparison of other options needs to be considered in supplier selection Comparison of other options needs to be considered in procurement choice Purchase Lease Single source/ multi source International Local etc 31

32 5 Criteria for business case (1.3a) Options or alternative solutions Example:- Purchase of a capital asset Advantages/ disadvantages of purchase leasing Other options could be looked at such as hire purchase/ upgrading/ system redesign 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 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, as payments are made in real money terms 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) 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 (benefiting from capital allowances) Contract terms may favour the lessor (e.g. limitations to use, liability for risks and costs) 32

33 5 Criteria for business case (1.3a) Alignment with strategic objectives How does the procurement fit into the strategic objective Important for procurement and supply chain activities to align with strategic BUSINESS OBJECTIVES Maintain or increase market share Improve profits, cashflow, and return on capital Shorten time to market Eliminate non-core activities Introduce continuous improvement Become world class supplier PURCHASING OBJECTIVES Provide supplies to match customer needs; assure quality; reduce delivery lead time; reduce cost Reduce stocks; improve reliability; more frequent deliveries Early supplier involvement Develop effective make-or-buy policy; integrate purchasing and capacity planning Reduce supplier base; partnership approaches; reduce product complexity; increase accuracy and reliability Work with suppliers to establish world class standards; improve flexibility of response to market conditions; liaison with technological sources 33

34 5 Criteria for business case (1.3a) Alignment with tactical objectives and timescales For a business case to be made, the proposal must, 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 constraints Be capable of fulfilling agreed specifications and achieving agreed objectives, standards, targets and KPIs Class exercise 1 Write a short draft of what you can expect to find in the business case for Aker s Lean Class exercise 2 - What is procurements role in creating the business case? 34

35 Sample possible examination questions LO Using examples to illustrate, explain the differences between a straight re-buy and a modified re-buy, as types of purchase (10) (1.1a) 2. Explain the difference between a straight re-buy and a modified re-buy (12) (1.1a) 3. A change in business needs may result in an item previously purchased as a straight re-buy being treated as a modified re-buy. Analyse the actions that a procurement department may need to take for the item in this new situation (13) (1.1a) 4. Explain the characteristics of the following types of purchase. (i) New purchase (ii) Straight re-buy. (10) (1.1a) 5. Describe FIVE activities that a procurement function might undertake when contributing to the development of a business case for a new purchase (15) (1.1c) 35

36 Sample possible examination questions LO A car manufacturing company is preparing a business case for the purchase of a new machine, to be used in the assembly of vehicles a) Describe FOUR commercial benefits that might be used as criteria to justify the business case (16) (1.3a) b) Describe ONE cost and ONE risk that could be included in the business case (9) (1.3a) 2. Explain FIVE objectives of a business case that could be used as the criteria to judge its success. (25) (1.3a) 3. Describe THREE elements to be included in a formal business case to justify a significant expenditure. (15) (1.3a) 36