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  Independent  Supportive  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-buy  Modified re-buy  New buy

New buy A new buy offers procurement the opportunity to:  undertake purchasing research  undertake value engineering  promote early buyer involvement (EBI)  promote early supplier involvement (ESI)  develop specifications, SLA’s, contract terms, KPI’s, etc

Procurement categories  Capital procurements  Production materials  Maintenance report and operating (MRO) supplies  Commodities  Goods 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 £1,0008,000 1 £1,2001,200 2 £ Installation and technical support1,800 Purchasing management software3,200 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

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 constraints  Be capable of fulfilling agreed specifications and achieving agreed objectives, standards, targets and KPIs