Diploma in Procurement & Supply

Business needs in

Procurement & Supply

• Session 1• Business Needs and Procurement

Decisions

Session Learning Outcomes

On completion of this session you should be able to:

Analyse how business needs influence procurement decisions

Explain the criteria that can be applied in the creation of a business case

Syllabus references 1.1., 1.3.

What are business needs? Organisation’s needs certain inputs (things) in order to

perform their activities and achieve their objectives

These things may be classed as goods or services

Procurement are notified of the need for these inputs in a variety of ways

The task of procurement is to meet these needs through achieving what is called the “5 Rights” of Procurement.

The five rights of procurement

Products of the right quality, supplied

in the right quantity

to the right place

at the right time

for the right price

Development of procurement

Reck and Long identify four strategic stages of the development of a procurement function

Passive IndependentSupportive Integrative

The procurement cycle

Identifying needs

• Someone in the organisation needs something

• That need cannot be met

• Procurement are notified

Notifying Procurement

Requisition form

Bill of Materials (BOM)

Feasibility study / cost benefit analysis / business case

Bill of Materials

Business Case

A Business Case:aims to gain approval for a project or activity

requiring significant organisational commitment by clearly demonstrating how it meets the needs of the business / its business benefits

We will be discussing Business Cases in more detail later.

Defining needs

Specifications

Service level agreements (SLA’s)

Contract terms

Key performance indicators (KPI’s)

Types of purchases

Below are three generally accepted categories of business to business (B2B) purchases.

Straight re-buyModified re-buyNew buy

New buy

A new buy offers procurement the opportunity to: undertake purchasing researchundertake value engineeringpromote early buyer involvement (EBI)promote early supplier involvement (ESI)develop specifications, SLA’s, contract

terms, KPI’s, etc

Procurement categories

Capital procurements Production materialsMaintenance report and operating (MRO)

suppliesCommoditiesGoods for resale

The Kraljic procurement portfolio matrix

The Business Case in more detail The main objectives of the Business Case Process include:

Fostering strategic, business-focused thinking Improving the efficiency and quality of decision-making Enabling management to evaluate proposals for feasibility,

suitability and acceptability Enabling management to compare alternatives and options Establishing measurable yardsticks by which the subsequent

performance, deliverables or outcomes of projects can be evaluated

Is the project or asset achieving the business case benefits anticipated?

Are the assumptions made in the business case turning out to be accurate?

Is the business case justification for the project still valid?

An informal business case structure

A formal business case structure

Executive summary Reference Context Value proposition Scope Deliverables Impacts Work planning Resource requirements Risk management and contingency plans Commitments

Cost benefit analysis •Costs £•Computer equipment:

8 PCs @ £1,000 8,000  1 server @ £1,200 1,200  2 printers @ £400  800  Installation and technical support 1,800  Purchasing management software 3,200•Staff training:  Introductory computing (6 people × £200) 1,200  Purchasing management system (8 people × £400) 3,200•Other costs:

Lost time (20 person days @ £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 10,000Improved 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

Lease or buy?

Corporate and purchasing objectives

Tactical objectives and timescales

A business case must also ensure that the procurement will 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 constraintsBe capable of fulfilling agreed specifications and

achieving agreed objectives, standards, targets and KPIs