Chapter 1Application of the procurement cycle

The CIPS Procurement Cycle

Not every procurement will follow the full Procurement Cycle. Procurements broadly fall into three categories, which require different parts of the cycle:

1. Straight re-buy
2. Modified re-buy
3. New buys (likely full procurement cycle)

Types of supplier partnerships:

Structured procurement processes

Processes: a sequence of steps by which a team does its functions and achieves goals.

Procedures: formal structured processes that are described as good practice.

Outcomes: what an organisation aims to achieve/actually achieves through its processes.

Some benefits of structured processes and procedures:

• Maintains consistency and business continuity of processes and outcomes
• Fosters efficiency by utilising best practice
• Enables effective governance and oversight
• Allows for better compliance with standards and statute
• Enables better analysis of business processes and performance

Best practice: a method that is described as most effective in delivering the desired goals, and recognised as highest industry standards.

You might attain best practice by:

1. Knowledge sharing with industry partners and education
2. Quality awards and achieving standards e.g. ISO 9000
3. Benchmarking (internal, functional, competitor)

Procurement could be overly outcome-focused (e.g. cost reduction, profits) or overly process-focused (e.g. following regulations). These have intuitive downsides.

Stage 1: Define business need

User department may issue a requisition, identifying a need. This will go to the stores department, and then the procurement function.

• Only certain people can raise a requisition: a budget holder with authority
• The procurement function plays an important role in challenging needs to refine specifications, order quantities etc
• Make/buy decision could need to be taken with this information

If the organisation uses an MRP system, the bill of materials (BOM) may indicate the need (automated).

Specifications are important: the choice between a conformance and performance specification was covered in L4M2.

• Procurement could be involved in specification development under 'early buyer involvement', to leverage knowledge such as market research, supplier contacts and contractual aspects
• Procurement may also need to sign off a specification
• Early supplier involvement (ESI) can also be used to leverage supplier knowledge and insight

Chapter 2Holistic application of the Procurement Cycle

STEEPLED

Porter's 5 Forces: measuring extent of competition in an industry

Market structures

1. Perfect competition: theoretical. One price for a good determined by supply/demand, with no individual supplier holding pricing power.
2. Monopoly: single producer, has full pricing power.
3. Monopolistic competition: imperfect competition. A large number of suppliers compete, producing differentiated goods that give them some ability to set their own prices.
4. Oligopoly: imperfect competition. A small number of suppliers compete, producing differentiated goods. They each have large pricing power, but will work together rather than unilaterally set prices.

Product lifecycles

SWOT analysis

This is useful for internal analysis of an organisation and how this relates to the external market.

• Strengths and weaknesses are the internal component: apply to the business
• Opportunities and threats are the external component: apply to market conditions

Ansoff matrix (likely won't get asked)

Growth strategies:

• Market penetration: sell more of existing products in existing markets
• Market development: find new markets for existing products
• Product development: develop new products for existing markets
• Diversification: develop new products for new markets

Procurement influences: Kraljic matrix

1. Strategic items: high complexity + financial importance
2. Leverage items: low complexity + financial importance
3. Bottleneck items: high complexity + low financial importance
4. Non-critical items: low complexity + low financial importance

Make vs buy decision

Keep things in-house that are crucial to operational performance and strategic for an organisation.

• You could form strategic alliances with suppliers for things that are strategic, but low priority in terms of operational performance
• Then look to eliminate or outsource other low-profile activity
• The other consideration is the competence of suppliers in the market, to do the thing you want to outsource

Stakeholder management: Mendelow Matrix

Egan's stakeholder groupings

1. Partners: advocates
2. Allies: will support if encouraged
3. Fellow travellers: passive supporters of the agenda
4. Bedfellows: support agenda but don't know/trust agents
5. Fence sitters
6. Loose cannons
7. Opponents: oppose agenda but not agents personally
8. Adversaries: oppose agenda and agents
9. Voiceless

Stakeholder management strategies

1. Goal analysis
2. Stakeholder marketing and comms
3. Relationship management

Chapter 3Contractual terms

Conditions that need to be met:

Terms can be either express or implied.

• Express: clearly stated in contract
• Implied: assumed to exist due to common law and statute

Each term can be either condition or warranty.

• Condition: a basic element of the agreement, and a breach will void the contract and allow damages to be claimed
• Warranty: doesn't void the contract, allows innocent party to claim damages

Standard and model form contracts

• Standard terms: companies have their own terms of doing business
• Model form contracts: written by third party experts / professional bodies

Service level agreements (SLAs): set performance requirements and levels for a service, including how they'll be monitored and how escalations managed etc.

Chapter 4Costing methods

Marginal costing: only uses variable costing of each additional unit produced.

Absorption costing: calculates total cost of producing a product. Adds a proportion of fixed costs to variable costs. Not an exact science.

Mark-up: profit as a % of cost.

Margin: profit as a % of selling price.

Contribution: difference between sales revenue and variable costs of sales.

Breakeven point: point at which volume of sales allows company to cover costs exactly.

Margin of safety: difference between planned sales volume and breakeven sales volume.

Analysing suppliers' finances

Procurement staff need to analyse suppliers' financial position to ensure stability:

• Sales and profits
• Assets and returns on assets
• Debt levels
• Liquidity
• Management of working capital i.e. inventory etc

Gross and net profit

Gross profit: difference between sales and cost of goods sold.

Net profit: profit after removing all costs e.g. marketing, admin. Net profit ratio is the ratio of net profit to sales.

Debt and gearing

Above 50%, a company is considered high geared, below 50% is considered low-geared.

Liquidity: current assets (including cash) and liabilities. There are two liquidity ratios:

• Current ratio: Current assets / current liabilities. Ideal ratio around 2.0
• Quick ratio or acid test ratio: Current assets excluding inventory, divided by current liabilities. Ideal ratio higher than 1.0

Working capital

Working capital contains 3 things:

• Inventory
• Debtors
• Trade creditors (money that is owed to suppliers)

Trade creditors and long-term capital funds the inventory and debtors. The length of time that a company has to wait before it gets cash from sales is the cash cycle.

The following measures are useful for evaluating suppliers' efficiency of working capital management:

Limitations of ratio analysis:

• Only one point in time, historically
• Doesn't account for seasonal changes
• Can lack context
• Are the measurements reliable?
• Need to draw the right conclusions

Chapter 5Whole-life asset management

Three requirements for a whole life cost model:

A capital expenditure appraisal model or DCF model discount future amounts to present day. A DCF model includes the cash inflows as well as outgoings in present value terms.

Things that may be excluded from a WLC model:

1. Pre-acquisition costs e.g. preparing a specification. This is because it's considered a sunk cost as the WLC model may only be started before going to market.
2. Finance costs

Uncertainty:

• Uncertainty increases the further into the future the estimates go
• Basic rule is that the best estimates available should be used
• Uncertainty analysis can help mitigate, by constructing scenarios on different assumptions etc
• A discount factor is used to account for inflation

Hidden costs:

• Acquisition costs
• Upgrades, repairs
• Change management costs
• Insurance
• Redundancies

Procurement staff will need to consider the costs, benefits and risks.

• Risk means that things may turn out differently to what was expected. There can be upside risks, but this is usually associated with downside risks

Hidden costs of global sourcing:

• Admin costs of imports
• Import duties
• Transportation costs
• International payments
• Political risk

Foreign currency risk is also important for long-term contracts.

Commissioning and decommissioning

Commissioning / acceptance testing: getting assurance that all parts of a major equipment have been designed and tested properly.

Decommissioning: activities needed to take an asset out of service and dispose safely.

• This has cost and environmental implications
• Future decommissioning costs need to be included in companies' accounts

Removal/disposal processes

Closed-loop recycling: process where the material used is turned into a new asset or converted back into the raw material.

Waste management

In the UK, the government says that businesses must:

• Keep waste to a minimum by preventing, reusing, recycling
• Sort and store waste safely and securely
• Complete a waste transfer note for every load of waste
• Check that waste carrier is registered
• Don't allow waste carrier to dispose of waste illegally

An externality is a cost or benefit that impacts people not involved directly in a transaction. Damage to the environment is a negative externality.

Companies will report on their progress towards this: triple bottom line reporting.

Chapter 6International ESG Standards

Some unethical behaviour could be illegal, others could be unethical but not illegal. These two distinctions have different impacts on business decisions.

There's also a distinction between personal ethics (moral views of individuals) and business ethics (actions of businesses).

International ethical standards e.g. the ILO's standards, implicate procurement:

• Actions that may have been ok in the past, like bribery, are now illegal
• There is reputational damage if standards aren't met

Corruption and fraud

Corruption: illegal/dishonest behaviour to gain personal benefit. Includes bribery and embezzlement.

Fraud: wrongful deception for personal gain. In the UK, this could be by false representation, not disclosing info, or abuse of power.

The fraud triangle: a decision to commit fraud has three influences. Pressure on the individual, opportunity and rationalisation.

Bribery: can involve cash, but could otherwise be gifts, hospitality etc. In procurement, this could be a supplier offering bribes to win valuable contracts.

• OECD Convention on bribery of foreign government officials: aimed to get states to tackle bribery in government. Tackles larger bribes but also smaller facilitation payments (paying to speed up administrative processes etc)

Human and employment rights

Human rights: Universal Declaration of Human Rights contains 30 articles

• ECHR is the European Convention on Human Rights, has its own court

Employment rights: International Labour Organisation (ILO) promotes employment rights, dialogue between employers and workers etc. Four fundamental principles:

• Freedom of association and right to collective bargaining
• Elimination of forced labour
• Abolition of child labour
• Elimination of employment discrimination

Non-Governmental organisations also promote workers' rights. The Ethical Trading Initiative is an alliance of major companies and trade unions, adopt a code of practice.

• Social Accountability International (SAI) is another one: they developed a standard for fair treatment, and created an SA 8000 standard based on UDHR and ILO

Modern slavery: the recruitment and use of children, women or men through force or coercion for the purpose of exploitation. Types of modern slavery can be:

• Forced labour
• Bonded labour
• Human trafficking
• Child slavery

Procurement needs to make sure that modern slavery is not in their supply chains.

Chapter 7Practices to support ESG in procurement

CIPS Code of Conduct

1. Enhancing and protecting standing of the profession
2. Promoting eradication of unethical business practices
3. Maintaining highest standard of integrity in all business relationships
4. Enhancing proficiency and stature of the profession
5. Ensuring full compliance with laws and regulations

Codes of practice in business

• All employees required to comply with it, and this enhances company's reputation
• Lower level of fraud and corruption
• Can encourage suppliers to adopt similar practices, and select suppliers with this in mind
  • Contracts may contain expectations of conduct, along with how this will be monitored and measured

Codes of practice will highlight:

• What conduct the business expects from employees
• Informs suppliers what may be expected from them
• Highlight criminal behaviour that isn't permitted
• How reporting mechanisms work for breaches of good behaviour
• May contain consequences of failing to meet code of practice

Prequalification and assessment criteria

A prequalification questionnaire can contain ESG questions. Assessment could involve a scoring system, with different weightings for each question.

• Could have a minimum score that the supplier has to achieve on ESG to qualify, or do on a total weighting basis where ESG is one of the weights

Due diligence of suppliers will also need to be carried out, before entering into negotiations. This enables the company to assess the supplier's ESG standards, and whether there are any risks for the company.

• This can happen through desk research and visiting supplier premises
• Concludes with a risk assessment

Compliance can be achieved by inserting terms into contracts:

• Using a recognised certificate like ISO 14001 (environmental) or SA 8000
• Allowance for buyer to do site visits for inspections, and periodic audits of supplier information
• Companies may be required by law to fill a modern slavery statement
• KPIs could be used: e.g. avg working hours per employee, workforce diversity measures, number of apprentices hired
• Company could impose KPIs on its own procurement staff to measure ESG of suppliers e.g. number of visits to supplier premises

Sustainability

Popular environmental issues are:

• Greenhouse gas effect
• Depletion of ozone layer
• Air pollution
• Toxic waste
• Energy consumption
• Fresh water shortage

Sustainable procurement: procurement that matches the need of an organisation while achieving value for money and benefits to wider society and minimises damage to the environment.

ISO 26000 social responsibility standard outlines principles of social responsibility such as accountability, transparency, respect for rule of law etc.

• Covers labour practices, environment, consumer issues etc

ISO 20400 sustainable procurement standard covers policy and strategy, and organising the procurement function.

Specifications should be used to create requirements that emphasise sustainability. E.g. embedding recycled components, durability. Reduce, re-use, recycle

Responsible procurement: procurement that adheres to ESG, is ethical and promotes sustainable development.

• Having good relationships with approved suppliers, timely communications, sustainable prices, paying on time etc.

Ethical behaviour by suppliers: comprises working hours, paying living wage, health and safety, freedom of choice, no discrimination etc.

• Fairtrade is a global movement which encourages businesses to pay fair prices: higher and more stable prices for small producers

Reporting frameworks

Many businesses publish reports each year for each of the ESG measures.

• Global Reporting Initiative (GRI) has promoted sustainability reporting, with different standards. Covering labour relations, health and safety, diversity etc

ESG reports can cover performance targets and measurement/explanation of progress against them. Regulations could mandate certain reporting.

Value for Money

Value for Money: 3 E's. Economy (costs), efficiency, effectiveness. Not about lowest cost, but MEAT (Most Economically Advantageous Tender).

Offset / industrial participation

This is where foreign government buyers may ask for provision of social benefits as part of a contract.

• Direct offset: exporter to ensure that firms in the buyer's country get some benefit through industrial participation. Could be by using local labour or knowledge transfer
• Indirect offset: customer getting something in return that isn't directly linked to the contract. E.g. other country buys X amount of goods from buyer country. Requires assistance from the Government of the supplier to agree.

Happens often with defence export contracts.