1. Click to t Diploma in Procurement & Supply Contexts of Procurement & Supply Session 1 Categories of Procurement and Supply Chain Management

2. Click to t Session Learning Outcomes On completion of this session you should be able to:  Explain the categories of spend that an organisation may purchase  Analyse the different sources of added value in procurement and supply Syllabus references 1.1, 1.3

3. Click to t Direct and Indirect Procurement Direct procurements include: –Goods for resale, or raw materials to be incorporated in goods for resale Indirect procurements include: –Other ancillary items, services and operating expenses including goods for maintenance, repair and operating (MR0)

4. Click to t Why distinguish between direct and indirect procurement? The quality of direct procurements has a direct impact on the quality of the goods and services produced by an organisation, whilst this is not normally the case for indirect procurements Direct procurements often held as stock Generally longer term supplier relationships built up for direct procurements Direct procurements are more often dealt with by the procurement and supply function, whilst indirect procurements are often dealt with by the end user

5. Click to t Production materials –Raw materials Items extracted from the ground, such as minerals, ores and petroleum Agricultural and forestry products –Components and assemblies The finished output of other manufacturers upstream in the supply chain –Work in progress Part-finished output, which is not yet ready for sale to customers

6. Click to t Commodity procurements –Producers – the people who produce and supply the goods –Buyers – the buyers and representatives of the consumers of products or services –Traders – buy goods and services at one price to sell to buyers and consumers to make a profit –Speculators – typically buy goods at a low price in the expectation that they will rise in price before they are sold on

7. Click to t Goods for re-sale –Bottom line thinking Where the focus is on profit –Broad assortment A wide range of individual stock items –Buying against supplier specifications Buying what is available in the market place –Short feedback loop Due to short time span between buying and resale –Technical complexity Usually low technical complexity compared to manufacturing

8. Click to t A ‘stocking for inventory’ policy This approach would be adopted: In situations of independent demand In situations of stable/predictable demand for low- value, non-perishable items Where there is a long lead time Where items are critical for operations Where there is a legal requirement to hold stocks Where inventory appreciates in value over time Where prices are expected to rise Where demand is seasonal

9. Click to t Maintenance, repair & operating ( MRO ) and capital items CONSIDERATIONS IN MRO PURCHASES CONSIDERATIONS IN CAPITAL PROCUREMENT AvailabilityTotal costs over life of asset CostAsset utilisation: lifespan, flexibility Ability to use standard/generic substitutes Space/access requirements Ability to minimise stockholdingTraining, health and safety requirements Supplier service levelsCost/availability of spare parts through the life of the equipment Post-contract maintenance service Options (buy, lease or hire)

10. Click to t Lease or buy? ADVANTAGES OF OUTRIGHT PURCHASE DISADVANTAGES OF OUTRIGHT PURCHASE Total cost is low, compared to rental High initial expenditure ties up capital The user has total control over the use of the asset User bears all costs and risks of maintenance, operation and disposal The asset may have residual re- sale value at the end of use Risk of technological obsolescence Capital allowances may be set against tax, and government grants may be available Wasteful, if equipment is needed only for a short period (e.g. a particular project)

11. Click to t Lease or buy? ADVANTAGES OF LEASINGDISADVANTAGES OF LEASING No initial investment to tie up capital Long-term commitment to pay instalments Protects against technological obsolescence User does not have total control of asset Costs are known and agreed in advance Total cost may be higher than purchase Fewer complex tax and depreciation calculations Large organisations may get better terms by securing their own finance to purchase Hedge against inflationContract terms may favour the lessor

12. Click to t What is a service? Services have been defined as: ‘Any activity or benefit that one party can offer to another that is essentially intangible and does not result in the ownership of anything’ – Philip Kotler In a developed economy services now account for the greatest proportion of economic activity, outstripping manufacturing.

13. Click to t Distinctive features of services –Intangibility (or in procurement terms, ‘lack of inspectability’: Baily et al) –Inseparability –Heterogeneity or variability –Perishability (or in procurement terms, ‘impracticability of storage’) –Ownership (or in procurement terms, ‘uncertainties in contractual agreements’)

14. Click to t Measures of service quality –Tangibles –Reliability –Responsiveness –Assurance –Empathy

15. Click to t Monitoring service levels –Observation and experience –Spot checks and sample testing –Business results and indirect indicators –Customer/user feedback –Electronic performance monitoring –Self-assessment by the service provider –Collaborative performance review

16. Click to t Outsourcing ADVANTAGESDISADVANTAGES Supports organisational rationalisation and downsizing Potentially higher cost of services, contracting and management Allows focused investment of resources on core competencies Difficulty of ensuring service quality/consistency and CSR Gives access to specialist expertise, technologies and resources of contractors Potential loss of in-house expertise, knowledge, contacts or technologies in the service area Access to economies of scalePotential loss of control Adds competitive performance incentivesAdded distance from the customer or end-user Risks of ‘lock in’ to an incompatible or under-performing relationship Risks of loss of control over confidential data and intellectual property

17. Click to t The Kraljic matrix

18. Click to t What to do now When you’ve worked through all the learning materials and associated reading relating to this session, follow the link below to assess your learning