Scope and Influence of Procurement and Supply

• The Chartered Institute of Procurement and

Supply
• Diploma in Procurement and Supply – L4M1

Wingsway Training Institute LLC 1

Learning Outcome 1: Understand and analyse the added value that can be achieved
through procurement and supply chain management

1.1 Describe the categories of spend that an organisation may purchase

1.2 Analyse the different sources of added value in procurement and supply
1.3 Compare the concepts of procurement and supply chain management
1.4 Differentiate the stakeholders that a procurement or supply chain function may have
Introduction to Procurement and Supply
● ‘Procurement’ is the process of acquiring goods, services and works by purchase and any other
means such as hiring, leasing, borrowing, barter, donation, pillaging, etc.
● ‘Purchasing’ is a method of acquiring goods, services, and works from suppliers using money as
a medium of exchange.
● ‘Supply’ is the activity of providing goods or services to a customer or user
● Procurement—a wider term than ‘purchasing’—includes sourcing, contract management and
supplier management
● Sourcing—identification, evaluation and selection of suitable suppliers
● Contract management—ensuring contractual obligations are performed by concerned parties
● Supplier management—monitoring, controlling and evaluating supplier performance and
relationships
● Procurement & supply function is the most influential, proactive, relational, strategic and
integrated function in modern organisations
● The procurement function is as old as trade and human civilisation

Scope of Procurement and Supply

● Goods are tangible or material items, which can be consumed

● Services are actions individuals or organisations perform which confer a

benefit, but do not result in the ‘ownership’ of anything

● Constructional works include projects such as the construction, alteration,

repair, maintenance or demolition of buildings or structures; the installation of
fittings; and so on
 Types of Goods
• 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
• Maintenance, repair & operating (MRO) items / Consumables
• Spare parts, oils & lubricants, tools, stationary, office accessories, health & safety items,
• Capital goods
* Fixed assets, e.g. Machinery, equipment, buildings, furniture, fixtures, vehicles, computers, etc.
• Goods for resale
• Retail products (merchandise sold to consumers)

1.1 Direct and Indirect Costs

Manufacturing
Cost elementSector DirectService
cost Sector Indirect cost
Materials
Currency: £ Materials used£in
Currency: Cleaning materials, spare
Sales 100 production
Sales parts, stationary
100
Raw Materials (50) Raw Materials (10)
Labour
Admin Costs (10) Production
Adminworkers'
Costs salary Wages
(50) of office staff,
Operations Costs (20) Operations Costs supervisors, management,
(20)
Profit 20 Profit 20canteen staff

•
Overhead Royalties, patents,
What is the impact of a 10% saving by procurement?
Rent and rates of factory or
copyright shop, light and heat,
insurance
 1.1 Direct vs Indirect Procurement
● Direct procurement—acquisition of goods and services typically identified in the end
product
• Examples include the raw materials used to produce a product.
• These procurements are integral to an organisation; without them, there can be no finished
product for the consumer.
• Examples from a construction organisation include bricks, cement, timber, labour

● Indirect procurement: goods and services procured to maintain and develop

operations
• typically consumed by internal stakeholders (business units or functions) rather than the
external customer
• Examples include wages of support staff, office rent and mobile phone contracts.
• Can often be sourced from several different suppliers and so supplier relationships can be very
different from those of direct and core procurements.

1.1 Stock vs Non-Stock Procurements

● Stock procurements
• Stored within an organisation
• Listed as inventory includes raw materials, components and finished goods
• Need to be managed carefully in order to keep inventory as cost effective as possible
• Effective stock control can save organisations huge sums of money,
● Non-stock procurements
• Not stored within an organisation and therefore not listed in inventory
• Commercial services (intangible) used to help run an organisation
• May be a one-off purchase
• Often capital purchases – check your understanding of this term
• Intangible, non-stock procurements belong to the tertiary sector
• It is just as important to get good value when procuring non-stock products or services
1.1 Capital & Operational Procurement

CAPEX purchases OPEX purchases

An asset purchased to last a long An ongoing expense to an
period of time organisation
Often paid as a lump sum or
Paid monthly or annually
through a bank loan
Accounted for and depreciated Accounted for in the current
over a period of time month or year
High value Low to medium value

1.1 MRO and Capital Items

CONSIDERATIONS IN CONSIDERATIONS IN
MRO PURCHASES CAPITAL PROCUREMENT
Availability Total costs over life of asset
Cost Asset utilisation: lifespan, flexibility
Ability to use standard/generic substitutes Space/access requirements
Ability to minimise stockholding Training, health and safety requirements
Supplier service levels Cost/availability of spare parts through
the life of the equipment
Post-contract maintenance service Options (buy, lease or hire)
1.1 Services vs Goods Procurement

● Services can be defined as "all those economic activities that are intangible and
imply an interaction to be realised between service provider and consumer."

Services Goods
●An activity or process ●A physical object
●Intangible ●Tangible
●Service is produced and consumed ●Separation of production and
simultaneously consumption
●Customers participate in production ●Customers may or may not
●Heterogenous participate in production
●Perishable—cannot be stored for ●Homogenous
future use ●Can be stored for future use or sale

1.1 The Kraljic Matrix

 1.2 The 5 Rights of Procurement
The main sources of added value (greater worth) are the 5 Rights of
Procurement
1. Quality: Obtaining goods which are of satisfactory quality and fit for their
purpose
2. Quantity: Obtaining goods in sufficient quantity to meet demand and maintain
service levels while minimising excess stock holding
3. Place: Having goods delivered to the appropriate delivery point, packaged and
transported in such a way as to secure their safe arrival in good condition
4. Time: Securing delivery of goods at the right time to meet demand, but not so
early as to incur unnecessary inventory costs
5. Price: Securing all of the above at a price which is reasonable, fair, competitive
and affordable

1.2 The Price-Cost Iceberg

1.2 Total Cost of Ownership (TCO)

1.2 Porter’s Value Chain

1.2 Use of Key Performance Indicators (KPIs)

1.2 Other sources of added value in procurement

● Internal customer service
● Risk management
● Cost control and reduction
● Relationship and reputation management
● Efficiency
● Responsiveness
● Lead-times
● Sustainability
● Market development
● Innovation
● Further ‘rights’ for external procurements
• The right procurement (or the right need)
• The right supplier (or supply chain)
• The right relationship
• The right process
1.3 Concepts of Supply Chain Management

1.3 Principal Flows in a Simple Supply Chain

1.3 A Simple Supply Network!

Figure 1.12 A basic supply chain Figure 1.13 A supply chain network
(Source: Arteria Technologies Private Limited, finessart.com)

1.3 Tiered Supply Chain Structures

1.3 Purchasing and Supplier Management

PURCHASING ACTIVITY SUPPLIER MANAGEMENT

ACTIVITY
Focus on non-critical items Focus on critical/strategic items
Ordering or calling off purchases Sourcing and appraising suppliers
Order expediting Rationalising the supplier base
Maintaining inventory Developing supplier potential
Receipt and storage of supplies Early supplier involvement
Arranging payment Negotiation
Supplier relationships
Monitoring supplier performance
Ethical and environmental issues

1.3 Benefits of an SCM Approach

• Reduced costs, by eliminating waste activities

• Improved responsiveness to customers’ requirements
• Access to complementary resources and capabilities
• Enhanced product and service quality
• Improving supply chain communication
• Sharing demand forecasting and planning information enables Just in time supply
• Faster lead times for product development and delivery – ‘Agile’ supply
• Better communication allows greater transparency
1.4 Stakeholders of Procurement and Supply

• Internal stakeholders
• Connected stakeholders
• External or secondary stakeholders
• Why stakeholders are important:
• They may seek to influence the organisation
• There is strong public and regulatory pressure for business organisations to be
‘socially responsible’
• Organisations themselves increasingly follow (and publicise) ethical and CSR
frameworks

1.4 Identifying Stakeholders

● Who is affected directly and indirectly by the organisation’s actions?

● Who has power to influence the organisation’s decisions?
● Who would be concerned if the project/organisation succeeded or failed?
● Who has a personal interest in the project/organisation?
● Who will benefit through success of the project/organisation?
● Who could help solve problems?
● Who sets the regulations that must be adhered to?
● Who carries out related actions?
1.4 Stakeholder Management Process

1.4 Mendelow’s Power/Interest Matrix

High C D

Keep Satisfied Key Players

POWER
A B

Minimal Effort Keep Informed

Low

Low INTEREST High

 LO 1.0 Review Questions
Question 1 – Learning Outcome 1
(a) Outline, using examples, FIVE elements of the total cost of
ownership of capital equipment. (10marks) LO 1.0 1.2
(b) It is widely believed that it is important to attempt to reduce costs
and add value throughout the supply chain.
Explain THREE innovative strategies that might achieve such
goals. (15 marks) LO1.0 1.2

2.0 Steps in Procuring Goods and Services

2.1 Explain the key aspects of the procurement cycle

2.2 Analyse the key stages of a sourcing process
2.3 Explain how electronic systems can be used at different
stages of the sourcing process
2.4 Analyse the relationship between achieving compliance
with processes and the achievement of outcomes
2.1 A Generic Procurement Cycle

2.1 CIPS Procurement Cycle

Figure 2.1 The CIPS Procurement cycle (Source: www.cips.org/en-gb/knowledge/procurement-cycle/. Slide 9

Copyright CIPS 2014. All rights reserved.)
32
2.1 CIPS Procurement Cycle: Stages 1–4

Figure 2.2 The make or buy decision Figure 2.3 The product lifecycle
based on Linton

Slide 9

2.1 CIPS Procurement Cycle: Stages 5–8

Invitation to tender Request for quotation

Document sent out to invite bids Document sent out to invite quotations
Formal Informal
Suppliers are often pre-evaluated Suppliers not usually pre-evaluated
Most commonly used in the Public Sector Most commonly used in the Private Sector
Response will be in set format Response will be in supplier’s own format
Terms can be negotiated Terms cannot be negotiated
Used when purchasing Standard, regularly used products
Used when purchasing Complex products or services
or services
Used when purchasing High value products or services Used when purchasing Low value products and services

Slide 9
2.1 CIPS Procurement Cycle: Stages 9–13

Collaborative Distributive

Information is shared Information is withheld

Needs are understood and attempted to be met No effort made to understand the other side

Common goals, strategies and objectives No shared goals

Focus of team work, openness and trust One sided, aims to meet own needs only

Aims for win-win situation Often results in win-lose situation

Long term relationship Usually short term or one off relationship

Open communication Little communication

Promotes supplier relationship management Focuses on contract management

2.2 Key Stages of the Sourcing Process

Stage Added value

Defining needs / developing Ensures quality standards are met and reduces need for requotes due to lack of
specification information or misinterpretation. Saves time

Developing contract / Ensures potential suppliers are fully briefed on the terms and conditions which
documentation eliminates at an early stage suppliers that cannot conform.

Supplier selection Evaluation of suppliers removes unethical, unsuitable suppliers and those in
financial difficulties

Contract award Saves time compared with spot buying. Ensures goods are sourced against
ongoing needs.

Contract / supplier management Develops relationships which increase the chances of innovation, change
management and trust between organisations.

Slide 9
 The ’10 Cs’ Supplier Evaluation Method

1. Competence (or capability)

2. Capacity
3. Commitment
4. Control
5. Cash
6. Consistency
7. Cost
8. Compatibility
9. Compliance
10. Communication

2.2 Contract Management

• Contract development
• Contract administration
• Contract maintenance, updating and change control:
• Contracts database management
• Budgeting and costs/charges monitoring
• Purchase-to-pay procedures
• Management reporting
• Dispute resolution
• Managing contract performance
• Contract review
• Supplier relationship management:
• Contract renewal or termination
2.2 Vendor Rating Criteria

• Price
eg measured by value for money, market price or under, lowest or competitive
pricing, good cost management and reasonable profit margins
• Quality
eg measured by key performance indicators (KPIs) such as the number or
proportion of defects, quality assurance procedures
• Delivery
eg measured by KPIs such as the proportion of on-time in-full (OTIF) deliveries,
or increases or decreases in lead times for delivery

2.2 Why have Structured Procurement Processes?

• It ensures that all tasks have been performed • It supports compliance with relevant
that need to be performed standards, law and regulation
• It ensures adequate co-ordination of effort • It enables the documentation and sharing of
between parties collaborating in a process good practice
• It helps to maintain consistency in processes • It enables meaningful process analysis,
and outcomes, problem-solving and improvement
• It prevents conflict and sub-optimal behaviour • It supports the systematic development of
• It fosters efficiency procurement staff, systems, technology and
• It supports good governance and managerial other resources
control • It supports the devolution of some
procurement tasks to non-procurement staff
2.3 Electronic Systems used in Sourcing

Slide 9

2.3 E-tendering

• The invitation to tender (ITT) is published on the buyer’s e-tender web portal; bid-related
documents are also posted
• Suppliers respond to the ITT by sending their bids using secure email
• Buyers can observe and manage the tendering process through a ‘front end’ web function
• In-built security features prohibit access to any of the tender responses until a specified time
• The system may include automatic scoring and evaluation capability
• Successful and unsuccessful bidders can be automatically notified of the award
 2.4 Compliance and achieving outcomes

LO 2.0 Review Questions

(a) Explain the activities that could be undertaken by an organisation to identify

and appraise potential suppliers as part of the sourcing process. (16 marks)
LO2.0 2.2 Supplier selection
(b) Explain THREE activities that take place in the post contract award. (9
marks) LO 2.0 2.2 Contract / Supplier management
3.0 Organisational infrastructure that shape the scope of a
procurement or supply chain function

3.1 Explain key aspects of corporate governance of a procurement or supply chain

function
3.2. Analyse the impact of organisational policies and procedures on procurement
3.3 Examine the different structures of a procurement or supply chain function
3.4 Explain the common IT systems that can be used by a procurement or supply chain
function

3.1 Corporate Governance in Procurement

Corporate governance is the system of standards, procedures, and policies by which an
organisation is controlled.
Why procurement governance?
● potentially control large sums of organisational funds
● are faced by many opportunities to commit financial fraud or to misuse systems or information
for personal gain
● their decisions typically benefit some suppliers over others – creating an incentive for suppliers
to try and influence those decisions
● Procurement professionals are in a position of trust within a business.
● Procurement professionals are in a ‘stewardship’ role.
● The standing, credibility and trust of the profession (and the employing organization) may be
damaged by fraud and other forms of unethical conduct.
● Supply chain relationships may be damaged by unethical conduct.
3.1 Conflicts of Interest

• Questions to ask yourself:

• Will I gain financially in addition to my salary?
• Do I have any personal relationships with colleagues or suppliers?
• Am I doing an identical role for a competitor?
• Should I disclose any of my concerns?

Figure 2.2 The 4D model Slide 9

3.1 What are ‘Ethics’?

Ethical issues may affect businesses and public sector organisations at three levels:
• At the macro level
issues of the role of business and capitalism in society
• At the corporate level
issues which face an individual organisation as it formulates strategies and policies about how it
interacts with its various stakeholders
• At the individual level
issues which face individuals as they act and interact within the organisation and supply chain
3.1 Ethical Codes and Standards

• Members must disclose any personal interest which might

impinge on their work activities, or which might appear to
do so.
• Members must respect the confidentiality of information
and must not use information received for personal gain.
The information they provide should be true and fair.
• Members should avoid any arrangements which might
prevent fair competition.
• Except for small-value items, business gifts should not be
accepted.
• Members should promote the eradication of unethical
business practices.
• Ensure compliance with the laws and regulations of
countries

3.2 Organisational Policies and Procedures

• Procedures for the procurement and supply function

• Procurement policies and manuals
• Procurement strategies
• The involvement of internal functions and personnel in the sourcing
• Responsible procurement and the International Labour Organisation
Core Conventions
3.2 Procurement Policies and Strategies

Figure 3.5 Policies and procedures

3.2 Involving other Functions in the Sourcing

Process
Function Involvement in sourcing process

Procurement Supplier evaluation, information gathering, specification collation, RFQ/ITT creation and
evaluation, purchase order placing, contract management

Sales Guide procurement on stakeholder needs, suggest sales figures to enable correct volumes to be
secured

Finance Set budgets, payment terms and credit limits. Analyse potential supplier’s financial performance.

Human resources Ensure staff are treated ethically and that working conditions are acceptable

Operations Help with testing, cost models, overhead costs training that may be required, bring in new
business to increase volume

Research and design Create specifications, give input on components from functionality and quality perspective, help
with cost reduction ideas

Slide 9
3.2 Objectives of the ILO

Decent work for all Decent work considers the aspirations of people in their working lives, such as their
aspirations for opportunity and income; rights, voice and recognition; and fairness and gender
equality

Employment creation The ILO identifies policies that help create and maintain decent work and income
Fair globalisation Globalisation enables global economic growth – but may also exploit some of the poorest in
society. The ILO seeks ways of ensuring that the benefits of globalisation reach more people

Rights at work Four fundamental principles relating to workers’ rights: freedom of association; elimination of
forced labour; elimination of discrimination; and elimination of child labour

Social dialogue The ILO supports negotiation, consultation and exchange of information between, or among,
representatives of governments, employers and workers on issues of common interest

Social protection Access to an adequate level of social protection is recognised as a basic right of all individuals
Working out of poverty People should have the ability to improve their situation not only in terms of income but also
in terms of respect, dignity and communication

3.2 The Ethical Trading Initiative (ETI)

1. Employment is freely chosen

2. Freedom of association and the right to collective bargaining are respected
3. Working conditions are safe and hygienic
4. Child labour shall not be used
5. Living wages are paid
6. Working hours are not excessive
7. No discrimination is practised
8. Regular employment is provided
9. No harsh or inhumane treatment is allowed
3.3 Different Procurement Structures

• The use of centralised and devolved structures

• Hybrid structures of a procurement or supply chain function
• Interacting with people and building rapport
• The need for customer service and value for money outcomes

3.3 Effective Organisation Structure

● Clear paths of reporting and accountability

● Effective mechanisms for multi-directional information flows and co-ordination
● Effectively short chains of decision-making
● Minimal duplication of effort
● Soft ‘vertical’ barriers between functions
● In-built flexibility
3.3 Functional Organisation

3.3 Geographical Organisation

3.3 Product (or Category) Organisation

3.3 Different Structural Forms

ORGANISATION ADVANTAGES DISADVANTAGES

Functional • Pools and focuses specialised skills and • Focuses on inputs/processes rather than
knowledge outputs/customers
• Share specialised technology and equipment • Creates vertical barriers to cross-
• Facilitates the recruitment, training and disciplinary communication
management of specialist staff
• Avoids duplicating functions

Geographical • Decision-making at the interface between • Duplication of functional activities

organisation and local stakeholders • Loss of standardisation, due to local
• Cost-effective (because shorter) lines of supply differences
and communication to local markets or plants

Product/brand/ • Clearer accountability for the profitability of • Increased managerial complexity and
customer different products/brands/customer groups overhead costs
• Specialisation of production and marketing • Possible fragmentation of objectives and
expertise markets
• Coordination of different functions by product
managers
 3.3 Types of Procurement Structures

Devolved Hybrid Centralised

How it works • Individuals are responsible • A mix of • The vast majority of
for their own procurement centralised and purchasing is done from a
devolved central location
Used by • Smaller organisations • Various • Large organisation with
multiple sites
Advantages • Specialist product • Reduces costs • Reduces costs and
knowledge • Reduces control
• Direct communication with workload • Enhances relationships
supplier
Disadvantages • Individuals aren’t • Reduces • Longer lead time
procurement professionals competition • Doesn’t support local
• No economies of scale • Internal suppliers or economy
conflict
• CLAN (centre-led action network)
• SCAN (strategically-controlled action network)
• Lead buyer approach Slide 9

3.3 Centralised Purchasing vs Decentralised

Structures

Centralised advantages Decentralised advantages

• Specialisation of procurement staff • Better communication and coordination between
• Potential for the consolidation of procurement and operating departments
requirements • Customer focus
• Greater co-ordination of procurement • Quicker response to operational and user needs
activities and environmental changes and problems by
local buyers
• Greater standardisation of specifications • Knowledge of, and relationships with, locally
• More effective control of procurement based suppliers
activity • Smaller purchase quantities
• Avoidance of conflict between business • Accountability
divisions • Freeing central procurement units to focus on
• Access to specialist skills, contacts and higher-level, value-adding tasks
resources
3.3 Hybrid structures - Outsourcing

Advantages Disadvantages

Difficulty in managing the change from internal to outsourced

Cost reduction
procurement

Reduced overheads (fewer procurement

Lack of control
staff required)

Need to ensure time spent managing outsource suppliers is less than

Reduced training costs
time previously spent on task

Can be problems integrating company systems with the outsourced

Economies of scale
procurement function

Access to highly skilled buyers Redundancies in current procurement team

Enables organisation to focus on core

Lack of continuity of supply and supplier relationships
competencies

Slide 9

3.3 Outsourcing Procurement

Benefits Challenges
• The freeing up of resources • The organisation loses a critical commercial skill and
knowledge base
• The ability to draw on procurement
knowledge, experience, expertise, contacts, • The organisation may lose control over vital data and
systems and technology intellectual property
• The potential for third party purchasers to • An additional management layer is needed to manage
aggregate demand and consolidate orders for the outsource provider
different clients
• The re-focusing of remaining internal
procurement staff on strategic issues
• Greater flexibility to adjust to peaks and
troughs of demand for procurement activity
3.3 Consortium Procurement

Benefits Challenges
• Enhanced bargaining power • Costs and effort associated with
communication and coordination, and
• A consortium can establish framework staff/policy development
agreements, simplifying purchase
administration for members • Transparency between consortium members
• Consortia may suffer from lengthy
• Consortium members can pool expertise, negotiation and decision processes
knowledge and contacts
• Aggregated demand may create very large
contracts
• Members are not obliged to purchase to the
agreed specification
• Very large consortia may fall foul of laws and
regulations

3.3 Hybrid structures – Shared services

Hybrid structures of a procurement or supply chain function:

Consortium structures
Shared services
Lead buyer structures
Outsourced
IT System Used by a Procurement Function

Use of manual or paper-based systems in procurement and supply is based replaced by

IT based systems such as:

* The procure to pay (P2P) process

* Inventory management
* Enterprise resource planning (ERP)
* To enhance communication

The impact of ICT

• Dramatically increasing the speed of communication and information processing

• Offering wider access to environmental and supply market information
• Facilitating 24-hour, 7-day, global business
• Supporting paperless communications, business transactions and service delivery
• Offering opportunities for cost savings
• Freeing up buyers’ time for creative and strategic aspects of their roles
• Enhancing management information
• Creating ‘virtual’ supplier relationships, teams and organisations
Inventory Management Systems
• Demand management: ensuring that supplies are available in the right
quantities at the right time
• Forecasting demand in order to avoid over-stocking
• Controlling stock levels to avoid over-stocking and production ‘bottlenecks’
due to stock-outs
• Ensuring that supplies are replenished in accordance with procurement
policies
• Developing cost-effective systems and procedures for ordering and
procurement of supplies
• Controlling the receipt, inspection, storage and issuing of supplies to users
• Ensuring that stocks are safe and secure from deterioration, damage, theft or
obsolescence

3.4 Inventory Management Systems

• Capturing goods inwards information accurately, and integrating this
information with stock balance, contract management and payment systems
• Recording stock movements and locations
• Translating issue requisitions into stock ‘picking and packing’ tasks
• Maintaining stock balances and stock valuations
• Triggering automatic replenishment requisitions
• Monitoring productivity and utilisation
• Maintaining stock integrity
• Producing evidence of stock movements for invoice verification and audit
trails
• Producing management reports using any or all of the above data
3.4 Inventory Management Systems

Slide 9

3.4 Management Information Tools

• Databases and database management

capturing and storing data in a structured way, so that they can be shared by
different users, and interrogated flexibly for a variety of applications
• Decision support systems
eg spreadsheets and computer models, used to examine the effect of different
inputs and scenarios on the outcomes of a plan or decision
• Management information systems
integrated systems for recording, storing and analysing a wide range of sales,
purchase, point-of-sale, inventory, maintenance, HR, financial and business
intelligence data, to support management decision-making
 3.4 The MRP Process

LO 3.0 Review Questions

(a) Define the term ‘ethics’. (5 marks) LO3.0 3.1

(b) (b) Discuss FIVE examples of ethical or unethical behaviour that
could be addressed in an ethical code for procurement professionals.
(20 marks)
4.0 The need for compliance with requirements when undertaking
procurement activities in different sectors

4.1 Classify different economic and industrial sectors

4.2 Analyse the impact of the public sector on procurement or supply chain roles
4.3 Examine the impact of the private sector on procurement or supply chain
roles
4.4 Examine the impact of the not-for-profit or third sector on procurement or
supply chain roles

4.1 Classifying Industry Sectors

● Primary industries are concerned with extracting natural

resources or producing raw materials
• Oil and mineral extraction (mining)
• Agriculture
• Forestry
● Secondary industries are engaged in transforming raw materials
into end components, assemblies or finished products
• Manufacturing
• Engineering
• Construction
● Tertiary industries are those engaged in the development and
provision of services
• Professional services
• Financial services
• Transport
4.1 Features of Retail Procurement
• Bottom line thinking
Buyers must focus on buying what will sell at good profit margins.
• Broad assortment
One of the functions performed by wholesalers and retailers is to make available to
customers a wide range of goods offered by many different manufacturers.
• Buying against supplier specifications
Retailers will generally buy what is available on the market, as described by the suppliers.
Changing suppliers is therefore easier for the retailer, and supplier relations tend to be less
durable.
• Short feedback loop
In resale contexts, buying a product and selling it are close together in time.
• Technical complexity
In retail organisations, the items purchased are usually of low technical complexity.

4.2 The Private and Public Sectors

In the private sector: In the public sector:

• Organisations are owned by their • Organisations are owned by the
investors, and controlled by directors government on behalf of the State,
or managers on their behalf which represents the public
• Activity is funded by a combination of • Activity is financed by the state, mainly
investment, revenue and debt via taxation – as well as any revenue the
• The primary purpose is the organisation’s activities may generate
achievement of commercial objectives • The primary purpose is achieving
• Competition is a key factor defined service levels
• The core ‘constituency’ served by • There has traditionally been little or no
firms is shareholders, customers and competition
employees, all of whom are involved • The ‘constituency’ of concerned
4.2 Public and Private Sector Purchasing
AREA OF
PRIVATE SECTOR PUBLIC SECTOR
DIFFERENCE
Objectives Usually, to increase profit Usually, to achieve defined service levels

Responsibility Buyers are responsible to directors, who in turn Buyers are responsible ultimately to the
are responsible to shareholders general public

Stakeholders Purchasing has a defined group of stakeholders Purchasing has to provide value to a wider
to take into account range of stakeholders

Activity/process Organisational capabilities and resources used Add value through supply of outsourced or
to produce goods/services purchased products/services

Legal restrictions Activities are regulated by company law, Most of this applies equally to public sector,
employment law, product liability law etc but additional regulations are present too

Competition There is usually strong competition between There is usually no competition

many different firms

Value for money Maintain lowest cost for competitive strategy, Maintain or improve service levels within
customer value and profit maximisation value/cost parameters.

4.2 Public and Private Sector Purchasing

AREA OF DIFFERENCE PRIVATE SECTOR PUBLIC SECTOR

Diversity of items Specialised stock list for defined product/service Wide diversity of items/resources required to
portfolio provide diverse services
Publicity Confidentiality applies in dealings between Confidentiality is limited because of public
suppliers and buyers interest in disclosure
Budgetary limits Investment is constrained only by availability of Investment is constrained by externally imposed
attractive opportunities spending limits
Information exchange Private sector buyers do not exchange Public sector buyers are willing to exchange notes
information with other firms and use shared e-purchasing platforms
Procurement Tend to be organisation-specific Tend to follow legislative directives
policies/procedures
Supplier relationships Emphasis on long-term partnership development, Compulsory competitive tendering: priority to cost
to support value chain minimisation and efficiency
4.3 Objectives of Public Sector Organisations

• To deliver essential public services

• To encourage national and community development
• To pursue socio-economic goals

Figure 4.1 Stakeholders in the public sector

(www.publicengagement.ac.uk)

4.3 Public Sector Purchasing Challenges

• Public sector buyers generally have the overall objective of achieving defined service
levels
• They are responsible ultimately to the general public
• They have to satisfy a wider range of stakeholders
• They may have a wider range of activities
• They are subject to established procurement procedures, and legislative directives
• They will often be subject to budgetary constraints, cash limits and/or efficiency targets
• Regulatory review:
• Procurement directives
• Anti-corruption law
• Freedom of information law
• Review by the National Audit Office (central government and public bodies) and the
Audit Commission (local government authorities)
4.3 Characteristics of Different Forms of
Business

Owner Owners –
Business Structure Owners Access to Finance
Liability? Management?

Sole Trader 1 Yes Yes Very Limited

Partnership 2+ Yes: Yes Very Limited

Joint & Several

Limited Liability Unlimited No Often Reasonable

Company

Public Limited Unlimited No No Very Good

Company

4.3 Corporate social responsibility (CSR)

• Law, regulation and Codes of Practice impose certain social responsibilities on

organisations
• Voluntary measures may enhance corporate image and build a positive brand
• Above-statutory provisions for employees and suppliers may be necessary to attract, retain
and motivate them
• Increasing consumer awareness of social responsibility issues creates a market demand for
CSR.
• Social responsibility helps to create a climate in which business can prosper in the long
term
4.3 Legal & Political Constraints on
Managerial Decision Making
• Restricting practices that tend to stifle competition
• Protecting the rights of minority groups
• Protecting the rights of employees
• Protecting the rights and safety of consumers
• Enforcing environmental protection standards and commitments
• Restricting the types of products that firms can supply or materials and
ingredients that can be used
• Restricting the uses to which firms can put personal data
• Enforcing good corporate governance
• Preventing corruption

4.4 Objectives of Third Sector Organisations

• Raising public awareness of a cause or issue

• Political lobbying and advocacy on behalf of a cause, issue or group
• Raising funds to carry out activities
• Providing material aid and services to the public or specific beneficiaries
• Providing services to members
• Mobilising and involving members of the public in community projects, for
mutual benefit
 4.4 Characteristics of the Third Sector

Objectives and expectations • May be multiple service objectives and expectations

• Expectations of funding bodies are usually very influential
• May be subject to political lobbying
• Multiple influences on policy: complicates strategic planning
• Consultation and consensus-seeking becomes a major activity
• Decision-making can be slow
Market and users • Beneficiaries of services are not necessarily contributors of revenue or
resources
• Multiple stakeholders and customers
• Service satisfaction is not measured readily in financial terms
Resources • Multiple sources of funding
• High proportion from sponsors and donors
• Resources received in advance of service delivery, often with attached
expectations
• Tends towards strategic emphasis on financial or resources efficiency rather
than service effectiveness
• Strategies and communications may be addressed as much towards sponsors
and donors as clients

4.4 Not-for-Profit Sector – Impact on

Procurement

Similarities with private sector: Differences from private sector:

• aim to achieve best value for money • suppliers might offer something for nothing
• conduct ethical procurement or reduced prices because they want to
• promote sustainability help the cause
• benchmark to ensure fair pricing • gifts and hospitality is allowed, but they
should be documented and verified to
• carry out supply chain management. ensure donors aren’t looking to influence
decision making.

Slide 9
 4.4 Charities Commission Objectives

● To register charities
● To ensure that charities meet the legal requirements for being a charity, and are equipped to
operate properly and within the law
● To check that charities are run for public benefit, and not for private advantage
● To ensure that charities are independent and that their trustees take their decisions free of control
or undue influence from outside agencies
● To detect and remedy serious mismanagement or deliberate abuse
● To work with charities and other regulators, to enhance public confidence in charities and the work
they do

LO 4.0 Review Questions

(a) Outline the impact of TWO private sector objectives on procurement
and supply chain activities. (10 marks)

(b) Outline the impact of THREE objectives in the 'not for profit' sector on
procurement and supply chain activities.
(15 marks)