1. Diploma in Procurement & Supply
Business needs in
Procurement & Supply
Session 1
Business Needs and Procurement Decisions

2. 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.
In this session we will look at
How business needs influence procurement decisions and
Look at the criteria that forms the basis of a business case.
The Syllabus will clearly state what you should be able to do at the end of this session – try to answer the self-test question on page 21 of your profex book. This Session is linked to Chapter 1 and Chapter 6 in your text book
We suggest that at the end of each session you review these session learning outcomes to ensure that you are able to complete the tasks / processes defined in them.

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.
Profex (1.2) states that the the functional and operational objectives of procurement is basically to provide the ‘right’ inputs to meet the operational needs of the orgainsation.

4. 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
These are the 5 Rights of procurement and form the basis of every procurement.
The right quality in the right quantity to the right place at the right time for the right price – these 5 rights form the basis of every procurement.

5. Development of procurement
Reck and Long identify four strategic stages of the development of a procurement function
Passive
Independent
Supportive
Integrative
Chapter 1 of your Profex book (page 3) includes details of the each of the four stages shown above including characteristics of each stage.
It is interesting to note that of the characteristics relating to the integrative stage frequently refer to strategy / strategic.

6. The procurement cycle
The diagram above shows a generic procurement cycle.
It is important to ensure that business needs are considered at each and every stage of the cycle.
The earliest points at which a business case can be prepared are identification and definition stages.
Therefore the focus of this unit is firmly on the identification, definition and communication of requirements.
So rather than discuss all of the various stages of the procurement cycle we will focus on identifying and defining needs.

7. Someone in the organisation needs something
Identifying needs
Someone in the organisation needs something
That need cannot be met
Procurement are notified
At its most simplistic:
I work for an organisation.
In order to complete a task I realise that I need a new piece of software(I am the user).
The organisation does not have this software available for my use.
The Procurement Department (or whoever is responsible for procurement if there is not a department) need to be notified – so that they can procure the software for me. The next slide shows some of the ways organisations use to notify Procurement of such needs.
That notification enables Procurement to meet my business needs.

8. Notifying Procurement
Requisition form
Bill of Materials (BOM)
Feasibility study / cost benefit analysis / business case
1)A requisition form (paper or electronic) describing the item needed is given to procurement. Or to look at it another way – a requisition form enables procurement to initiate action that will fulfill the identified need.
2) On the next slide we will show you an example of a BOM
3) Large scale procurements are typically accompanied by a Feasibility study/ cost benefit analysis and or business case.

9. Bill of Materials 2) Bill of Materials
Organisations using an materials requirements planning system (MRP) may use a BOM instead.
According to Lysons and Farrington (2012) MRP is a technique that assists in the detailed planning of production and has three characteristics:
It is geared specifically to assembly operations
It is a dependent demand technique
It is a computer-based information system.
The aim of an MRP is to have materials ready just before they are require and an MRP enables items / batches to be tracked throughout the manufacturing process to help procurement have the right materials in the right place at the right time – remember the 5 rights of procurement mentioned earlier!
So a BOM aims to forecast the manufacturing schedule, translate this into the materials / parts needed for production – the Bill of Materials. Comparing the BOM with stock files will establish procurement needs.
For those particularly interesting in BOM – there is a website dedicated to Bill of Materials -
Both of the above talks in terms of needs being notified to procurement and procurement initiating the actions required to meet those needs – that may involve procurement going back to the originator to, for example, suggest better value alternatives, question over specification etc.
By doing this procurement can add real value, it can for example:
1) reduce waste (why do we buy the 500ml size when we only use 350ml and a 350 ml pack is available now?), 2) reduce variation (do we really need 5 different types of scissors?)
3) improve service levels (this other manufacturer only needs 24 hours lead time)
4) reduce costs (this manufacturer charges the same price, offers the same quality but delivers for free)

10. 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.
For larger scale procurements a formal feasibility study, a cost benefit analysis or a business case may be required. An organisation’s procurement policy’s will often state when these are required. For example a formal business case must be presented to the Board for consideration for all purchases with a value of over £50,000.
Typically a business case will need to demonstrate that the activity is consistent with the strategic objectives of the business and how the intended activity will meet or benefit the needs of the business
In the case of procurement that could be in the form of, for example:
Increased competitive advantage
Reduced lead times
Cost reduction
etc

11. Defining needs Specifications Service level agreements (SLA’s)
Contract terms
Key performance indicators (KPI’s)
Once the need has been identified the requirement needs to be defined in the form of a detailed description if one doesn’t already exists.
This can be done through :-
Specifications
Service Level agreements
Contract terms and
Key Performance Indicators
We will be discussing all of the above in more detail in later sessions.

12. Types of purchases
Below are three generally accepted categories of business to business (B2B) purchases.
Straight re-buy
Modified re-buy
New buy
There are three generally accepted types of purchases
A straight rebuy is simply where the same item is bought again from the same supplier. But – is this supplier / is this product still be best way of meeting the identified need?
A modified rebuy - this may be needed for a range of reasons and can offer an opportunity for procurement to better meet the current business needs. De[ending on the nature of the modification, formal justification in the form of a business case may be required.
A new buy is just that – the purchase of something that the organisation has not specified or sourced before.

13. 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
With a new buy, procurement are more likely to undertake a full, systematic procurement process that may well require a detailed business case to be prepared, particularly if the goods involved are strategically important to the organisation or are complex.
Page 8 in your Profex book provides examples of how business needs might influence procurement decisions

14. Procurement categories
Capital procurements
Production materials
Maintenance report and operating (MRO) supplies
Commodities
Goods for resale
Another way of looking at the type of items procured by an organisation is to look at procurement categories.
Capital procurement involves:
Systematic appraisal of the benefits, costs and risks of the investment, and likely ‘payback’ period of the investment
Robust comparison of alternative assets or option to reach the optimal solution
Balancing the whole life costs (WLC) and performance, functionality and quality of the asset
Negotiation, specification and contracting with the chosen supplier for a total ‘package’ of benefits sought over the asset’s lifecycle
Analysis and management of lifecycle costs
Management and maintenance of the asset in such a way as to prolong its useful life and maximise its residual value on disposal.
A lot of companies align their procurement function around category management – think about how your organisation is set up - Is it aligned to categories of to functions?

15. The Kraljic procurement portfolio matrix
The Kraljic model is on of the core procurement tools and students are expected to be able to draw and define how the Kraljic model can be used.
Your Profex book on page 11 examines each of the four quadrants in detail
Additionally Lysons and Farrington (2012) define the Kraljic procurement portfolio matrix as:
The profit impact (importance) of a supply item in terms of:
The volume bought
The percentage of total cost
The impact on product quality or business growth.
The supply risk (complexity of the supply market) in terms of:
Availability
Number of suppliers
Competitive demand
Make or buy opportunities
Storage risks
Substitution
On the basis of the above all purchased items can be allocated to one of the four quadrants shown above.

16. 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?
We are now going to look at Business Case
Why it is used
What are the key criteria you would expect to see contained within it.
Being able to define what is in a business case is a question that is often used in CIPs exams and if not a direct question being able to set out elements of it will help support other questions so an area that you want to fully understand
A business case is usually only used where the value exceeds a certain amount ie: £50k
This is because a full scale formal business case takes time and money to prepare and consideration should be given to when one is required.

17. An informal business case structure
This is a typical business case and details the different criteria it would contain
The criteria for a business case includes the following:
The business benefits. Some of the business benefits that can result from a procurement, proposal or project are listed above.
Added value. A strong business case will generally refer to added value in terms of both reducing cost (while maintaining quality) and improving operational efficiencies.
Competitive advantage – being more effective / efficient than your competitors in a way that delivers greater added value to customers
Costs –we will look at identifying and estimating procurement / project costs in a later unit.
Risks it is of vital importance that a business case considers both internal and external risks
Cost benefit analysis - the next slide shows a typical cost benefit analysis
Options or alternative solutions – is purchasing an item the optimal solution? Is purchasing an item from one supplier the optimal solution? A slide comparing the advantages and disadvantages of leasing vs buying is included later in this session

18. A formal business case structure
Executive summary
Reference
Context
Value proposition
Scope
Deliverables
Impacts
Work planning
Resource requirements
Risk management and contingency plans
Commitments
Depending on the complexity you may also need to include these additional items
You will find more about each of these sections on pages 13 – 14 of the CIPS Profex text book.

19. Cost benefit analysis
Costs £ Computer equipment: 8 £1,000 8,000 1 £1,200 1,200 2 £ 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 £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
Cost/benefit analysis is a relatively simple exercise for deciding whether or not to take forward a plan or procurement.
Here is an example of a cost/benefit analysis – have a read through it – do the benefits outweigh the costs?
Consider what are the risks?

20. Lease or buy?
Quite often one of the key things that needs to be considered is whether to buy or lease. Typically these Decisions are usually linked to Capital purchases.
Having read through the advantages and disadvantages consider what these might be if you were considering lease of but for
a fleet of cars; or
a managed IT Service.

21. Corporate and purchasing objectives
We have already discussed the importance of procurement being aligned with the organisation’s strategy.
The above shows some links between corporate and purchasing objectives.
Procurement can also play a major role in advancing an organisation’s corporate social responsibility agenda via sustainable sourcing.

22. 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
While it is important to be strategic, it is also important to ensure that the operational needs of the procurement will be met – remember the five rights of procurement we discussed earlier.
Often orgainsations will need to consider a tactical solution whilst it fully investigates it long term strategic solution. Ideally the tactical solution should support or provide information to help define the strategic solution