McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 6 Need Identification and Specification

6 - 2 Need Identification Criteria Strategic e.g., total spend, risk reduction, access to new technology or new markets, assurance of supply in tight markets, etc. Traditional supply criteria quality, quantity, delivery, price and service Additional current criteria financial, risk, environmental, innovation, regulatory compliance and transparency, social and political factors

6 - 3 Categories of Needs CategoryDescription ResaleRetailers, wholesalers, distributors, agents, brokers and traders can resell any items below. Raw and Semi- Processed Materials Most users of materials are converters, such as factories, and this category includes commodities, agricultural and industrial. Parts, Components and Packaging Assemblers use parts and components produced by their suppliers to create a finished product. Parts and components may be standard or special depending on the decision of the designer of the finished product.

6 - 4 Categories of Needs CategoryDescription Maintenance, Repair and Operating (MRO) Supplies and Small Value Purchases (SVP) Every organization has MRO requirements and SVPs. Availability is critical to maintain uninterrupted operation of the office, factory, facility, etc. Many MRO requirements are relatively small (dollar) value purchases (SVPs). Assuring availability at minimum acquisition cost is a challenge. CapitalAny requirement that accountants classify as capital, and, therefore, an investment, becomes a capital item. Equipment, IT, real estate and construction are included in this category. Capital items can be depreciated, are often bought under a separate budgetary allocation and may require special financing arrangements.

6 - 5 Categories of Needs CategoryDescription ServicesEvery organization acquires a variety of services. OtherAnything not covered by the above categories. Major requirements could be energy and water. Also includes unusual and infrequent requirements, probably better dealt with on an ad hoc or project basis.

6 - 6 Opportunity to Affect Value 1. Need recognition 2. Description 3. Potential suppliers 4. Selection 5. Receipt 6. Payment Opportunity to affect value High Acquisition Process Steps Low

6 - 7 Methods of Description By brand “Or Equal” By specification Physical or chemical characteristics Material or method of manufacture Performance By engineering drawing By miscellaneous methods Market grades Sample By a combination of two or more methods

6 - 8 When Description by Brand is Desirable Either the manufacturing process is secret or because the item is covered by a patent Specifications cannot be laid down with sufficient accuracy The quantity bought is so small End customers or users have preferences in favor of certain branded items

6 - 9 Advantages of Buying with Specifications Evidence exists that thought and careful study have been given to the need and the ways in which it may be satisfied A standard is established for measuring and checking materials as supplied, preventing delay and waste that would occur with improper materials An opportunity exists to purchase identical requirements from a number of different sources of supply The potential exists for equitable competition The seller will be responsible for performance when the buyer specifies performance

Limitations in Using Specifications There are requirements for which it is practically impossible to draw adequate specifications The use of specifications adds to the immediate cost The specification may not be better than a standard product The cost is increased by testing to ensure that the specifications have been met Unduly elaborate specifications sometimes result in discouraging potential suppliers from placing bids in response to inquiries Unless the specifications are of the performance type, the responsibility for the adaptability of the item to the use intended rests wholly with the buying organization The minimum specifications set up by the buying organization are likely to be the maximum furnished by the supplier

Standardization and Simplification Standardization: Agreement on definite sizes, design, quality, or other aspects of the product or service. A technical and engineering concept Simplification: A reduction in the number of sizes, designs or other aspects of the product or service. It is a selective and commercial problem It may be applied to articles already standardized or as a step preliminary to standarization