CIPS Level 4 Diploma in Procurement and Supply operations

Tutor Notes
Module title: Defining Business Need [L4M2]

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Leading global excellence in procurement and supply

Learning Outcome 1 Understand how to devise a business case for requirements to
be sourced from external suppliers
These notes are designed to support teaching staff using the CIPS Teaching Resources PPT slides.
Teaching staff are advised to cross reference against the relevant module content and learner
resources (e.g., study guide). Supplementary resources are available on cips.org in the Student Zone,
CIPS Knowledge and Supply Management online journal (www.cips.org).

SLIDE TUTOR NOTES

1 Not applicable

2 There are three types of business need – refer to diagram on slide for examples of each
one.

Straight re-buy – the purchase of something that an organisation has bought before
• Business need has already been defined
• Specifications are already in place
• Generally, suppliers will already be contracted to agreed terms and conditions,
and the procurement task is to raise a requisition and place a purchase order

Modified re-buy – similar to a straight re-buy but there are some changes to the
specification
The business need will need to be revisited, particularly if it is part of a cost-reduction
programme.
The procurement task is to:
• Create a sourcing strategy
• Decide on the route of the market
• Decide how to implement the new supply arrangements
• Determine how to track results and benefits
• Define the trigger events that will restart the sourcing process

New purchases – made when the organisation identifies a completely new requirement
not purchased before.
The procurement task is to:
• Understand the business requirement
• Write an effective specification for what is needed
• Research the supply market and key suppliers
• Decide on the key capabilities that the suppliers must have
• Write tender documents
• Manage the tender process
• Negotiate
• Select the supplier
The new purchase will usually involve many people from different departments in order
to mitigate risks to the organisation.

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SLIDE TUTOR NOTES

Learner activity
• Learners to work in small groups and discuss examples of each type of need from
each of their organisations and write a list.
• Bring the class together and ask for at least one example of each type of need from
each group.
• If learners have been involved on a modified re-buy or new purchase, how did they
develop a sourcing strategy or gather information to inform the specification?
• What other departments were consulted and what aspects were they interested in,
or what information did they provide?

3 Business case – a justification for undertaking an action. Its purpose is to seek approval
and possibly finance for the recommended plan of action.
Should clearly identify:
• The opportunity it seeks to exploit or the problem the business case will solve.
• The benefits of the proposed action
• Any risks involved and how they can be mitigated
• Timescales for completing the project
• The roles and responsibilities involved (i.e. who will do what)
• Why something needs to be done and not just what needs to be done.

In procurement, a business case is prepared for a number of reasons.

• When a contract is coming to an end and the product or service needs to be
procured again.
• When cost reductions need to be made which require changes to the way the
organisation operates.

Contents of a typical business case for a procurement new buy or modified re-buy – talk
through content on slide

The business plan should engage and enthuse senior management and directors and
describe how the proposal will impact the things that are important to them.
• Return on investment
• Time to market
• Improved productivity

Learner activity
Learners to identify a new or modified re-buy from their own organisation.
Ask them to make notes on what they would include in each section of a business case for
the chosen example, and/or questions they would need to ask, or research they would
need to undertake in order to have all the information they would need.
4 When estimating costs there are different categories of costs to consider.
• Direct costs – the cost of activities that can be completely attributed to the
production of a product or the delivery of a service
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SLIDE TUTOR NOTES

• Indirect costs – the cost of activities used in multiple activities and that cannot be
attributed to any one product or service
• Fixed costs – stay the same regardless of the level of output, e.g., a warehouse
worker’s salary needs to be paid regardless of how many deliveries they take in
• Variable costs – vary in line with the level of output, e.g., more timber is needed to
make 1000 bedframes than 100 bedframes, and the price paid for the timber will
change in line with the output

Learner activity
1. For your organisation, list as many costs you can think of.
2. Make a two-by-two grid on a sheet of paper with ‘direct cost’ and ‘indirect cost’ as
the column headings, and ‘fixed cost’ and ‘variable cost’ as the row headings.
3. Categorise each of the costs in your list according to whether they are fixed or
variable and direct or indirect.
(Tutor) lead a class discussion to draw out some examples and discuss the categories they
were allocated to.

5 Two ways to produce estimated costs and budgets:

• Break even analysis
• Purchase price cost analysis

The break even point – refer to graph on slide

• The point where lines cross over when total costs and sales revenues are plotted
on the same graph.
• It is the point where the sales revenue value is equal to the value of total costs
required to generate the revenues.
• Knowing a supplier’s break even point can be useful when entering negotiations
with suppliers as it tells you what their lowest price would be.

Purchase price cost analysis (PPCA) – used to analyse the costs of purchases so strategies
can be developed to reduce costs and improve supplier relationships.
Process:
• Benchmark the purchase price against a price comparator to determine if it is fair.
• Three sources of price comparators.
• Prices that have been paid in the past, so long as prices are adjusted to
account for inflation or deflation.
• Published prices, such as those found in catalogues.
• Pricing formula, for example, the cost of building offices could be
benchmarked as between £2000 and £2200 per square metre.
• Use a segmentation model (refer to diagram on slide) to consider the nature of the
purchase (ongoing or a one-off) and desired relationship with the supplier (arms’
length or strategic alliance). This produces the following four quadrants.
• Leverage
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SLIDE TUTOR NOTES

• Strategic
• Low impact
• Critical projects
• If an arms-length relationship, such as for leverage purchases, is required, an
organisation can use cost estimating and value analysis.
• Competitive bidding can be used to compare prices by using market competition
to obtain each supplier’s best price for comparison.
• Where a strategic alliance is required, buyers should work co-operatively with
strategic suppliers to find ways of reducing costs to achieve a target cost. For
example, life-cycle costing and total cost analysis of the supply chain should be
used for critical projects.

Learner activity
Prepare a worksheet with total costs and sales revenue figures for fictional organisations.
Learners to plot figures on a graph to find out the break even point.
Class discussion to analyse the results of the exercise.
• Which organisation has the lowest break even point
• What does this indicate?
• How can knowing this help you in a negotiation?

6 When evaluating a business case, check the following:

1. Is it clear what the objectives are? Issue management considers three potential
sources of information to determine whether an objective is strategic or not:
• external trends
• performance trends
• internal trends
2. Does it reflect a real and legitimate business opportunity or problem?
The ‘five whys’ can be used to test whether or not an objective represents a real
opportunity – keep asking ‘why’ to delve deeper and uncover the true underlying issue.

Class discussion
Propose a scenario and ask learners to suggest causes/reasons.
After each suggestion, ask ‘why’, to prompt them to dig deeper.
Repeat four times.

The business case should show that a number of options to reach the objectives were
considered before selecting the best one.
• Strategy options can be generated by using brainstorming techniques with a peer
group.
• It is possible to benchmark similar strategies used by other organisations.
• Hybrid strategies can be developed by comparing features of existing strategies
and combining them to form new ones.

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SLIDE TUTOR NOTES

Cost–benefit analysis – compares the costs with the benefits of each option presented.
• Carried out by adding up all of the financial benefits of the option and subtracting
all of the costs associated with it.
• Some strategies can be considered and even adopted for reasons other than
commercial ones.
• This is particularly true in the public sector where there might be a political reason
to choose a specific option.
• The value of the cost–benefit analysis in this case is to show the financial
consequence of the choice made.

Risk assessment section – shows the major risks that have been considered and identifies
the actions that can be taken to reduce or eliminate the risk.

The implementation plan – covers factors such as:

• Whether roles and responsibilities have been allocated and agreed
• The suitability of the communication strategy
• Whether there is a change management strategy
• Whether the specification and procurement route has been agreed
• The time allocated for key tasks, such as writing tender documents, negotiating
and writing the contract

7 Financial budget
• A plan of how an organisation or department proposes to raise income and then
spend it.
• Helps an organisation see what funds it will have to meet obligations and whether
there will be sufficient surplus funds to reinvest in the business.

The Plan-Do-Review cycle is used to manage a budget – refer to diagram on slide.

Learner activity
1. Obtain a copy of the financial budget for your department.
2. Identify the top three categories. How do they relate to the organisation’s goals?
3. Who has responsibility for budgets within your department?
4. How regularly are budgets monitored and reviewed? (Note: these are separate
activities.)
8 In order to prepare and manage budgets effectively, it is necessary to understand what
cost entries apply to the budget and how and when these impact the organisation’s cash
flow.

Use the diagram on the slide to explain why there is a delay between revenue and costs.
Obtain a copy of company accounts, or create a mock-up with simplified figures to
facilitate the following explanations.

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SLIDE TUTOR NOTES

Accrual – an adjustment made to the accounts to match costs to revenues in the same
month.

In accounting, revenues in a month should be matched with costs in the same month
• The amount used in a cash flow calculation is the actual amount that enters the
bank account in the month (excluding accruals).
• The value including accruals is the one that is used to record revenues in a profit
and loss account.

The same applies to direct costs. Purchases from suppliers will have been made on credit
and so not all of them will have been paid for at the month end.
• The value of items that leave the bank account is used for cash flow.
• Costs are adjusted by accruals for the profit and loss account.

Overheads are split:

• Internal staff costs are paid for in the accounting period (month or year) under
review, so no adjustment is required.
• The rest (usually from external suppliers) are items consumed in the accounting
period but not yet paid for – treated as accruals for profit and loss purposes.

Large assets such as machinery or office furniture last for several years.
• The full purchase price will be reflected in the cash accounts at the point of
purchase.
• In the accounts, a portion of the cost (known as depreciation) can be allocated to
each year that the asset is expected to last. The depreciation amount is used for
the profit and loss account.

Bank loans generate cash for an organisation at the point of drawdown.

• They are counted as cash within an accounting period.

Learner activity
Identify an example of each of the costs for your organisation.
Identify where and how they are recorded in your organisation’s financial budgets.

9 Wade works for an environmental awareness charity.

He has been asked to procure the following:
• Polo shirts with the charity’s logo on. The new director thinks it will present a
positive image if all staff wear corporate workwear rather than their own clothes,
as is currently the case. He wants each member of staff to be given five polo shirts.
There are 20 members of staff.
• Order 5000 more copies of a promotional leaflet they have previously had printed.
• Source designers to develop a new promotional leaflet.
He needs to produce costs and estimates for each need, and write a business case where
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SLIDE TUTOR NOTES

relevant.

In small groups, discuss the scenario and the following questions, then write down your
answers.
1. What type of business need is each of the procurements? (Straight re-buy,
modified re-buy, new purchase)
2. Which of the needs above is likely to take Wade the longest time to deal with?
Why is that?
3. What are the steps required when undertaking a purchase price cost analysis?

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Learning Outcome 2: Understand market management in procurement and supply
These notes are designed to support teaching staff using the CIPS Teaching Resources PPT slides.
Teaching staff are advised to cross reference against the relevant module content and learner
resources (e.g., study guide). Supplementary resources are available on cips.org in the Student Zone,
CIPS Knowledge and Supply Management online journal (www.cips.org).

SLIDE TUTOR NOTES

10 Not applicable

11 Class discussion
Determine learners’ prior knowledge of the manufacturing industry’s objectives and
drivers.

Manufacturing’s objectives include:

• Improving quality
• Reducing costs
• Speeding up throughput
• Increasing flexibility

Its drivers are:

• Consumer’s desire for differentiated products
• An increasing role for intelligent products that integrate with a connected world
• A need to reduce time to market
• A need to increase productivity
• A need to reduce costs by doing more with less

Governance – fragmented supply chains of suppliers who may form collaborative

networks, which are often co-ordinated by large OEMs.
Predominantly owned by shareholders.

Raw materials are a commodity.

Components and finished products are a non-commodity.

The manufacturing market is very diverse – there are 20 or more subdivisions in the
Standard Industry Classification (SIC) system.
When analysing a large market, segment it into buying groups that have the same or
similar needs and organisations whose products or services are aimed at meeting those
specific needs – refer to diagram on slide
An example of a market in the manufacturing sector is the automotive market.
12 Retail’s objectives are: (refer to content on slide)
• To grow market share
• Increase brand awareness
• Enhance customer relationships
• Introduce new products
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SLIDE TUTOR NOTES

Its drivers include:

• Economic growth and level of unemployment
• A shift from bricks and mortar retailing to online shopping
• The ability to collect and analyse data to identify consumer needs
• A rise in social media shifting power to consumers

Governance – many retail markets are co-ordinated and managed by large retail groups
using a global network of smaller suppliers.
They may be owned by:
• Franchises
• Sole traders
• Shareholders

Food retailing is a mixture of commodity and branded non-commodity products.

Other retailers are largely non-commodity.

Class discussion
Ask for an example of a retail supplier
• Are they commodity or non-commodity products?
• Have you been involved in, or are you aware of, any negotiations that have taken
place with the retail supplier? What was the outcome?
• Based on this, how much power did the supplier exert in the negotiation?
• Was this as expected based on what we have just learned? If not, what other
factors could have played a part?

13 Services’ objectives are: – (refer to content on slide)

• To achieve high customer service
• To build customer relationships
• To continuously improve processes
• To empower staff

Its drivers include:

• The availability of high-quality staff
• Increasing linkages of services to products to create total solution for clients
• The need to differentiate offers versus those of the competition

Governance – in largely people-based businesses, individuals are co-ordinated and

managed by individual service companies.
They may be owned by sole traders, limited companies, franchises, or partnerships.

Lawyers, architects and management consultants are examples of professionals that work
primarily in the services market.
Class discussion:
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SLIDE TUTOR NOTES

How can understanding an industry’s objectives and drivers help when negotiating with
suppliers from that industry?

Learner activity
Which industries does your organisation deal with?
What are its/their key objectives and drivers?
How could this knowledge impact on the way that you negotiate with suppliers in that
industry?

14 Porter’s Five Forces

• For a market to be sustainable in the long-term, it must be a profitable industry for

the businesses competing in it, and those businesses must be able to find ways to
remain competitive.
• Analysing the forces that act on an industry help to understand the attractiveness
of the industry.
• Porter proposed five forces that act on an industry – refer to diagram on slide
• Threat of new entrants – if a market enables all firms within it to make profits then
it is likely to attract new firms into the industry. However, there can be a number of
barriers to a firm entering a market.
• Threat of substitution – the risk of buyers switching to alternative products or
services, known as substitutes.
• Buyer power – the amount of bargaining power that buyers exert in an industry. It
can come from a group of buyers all asking for the same thing or an individual
company in an industry that has few buyers.
• Supplier power – the amount of bargaining power that suppliers can exert on firms
in an industry.
• Rivalry – if this exists between firms it means that they take positive action to try
and take market share from each other, which in turn can lead to increased profits
for those that gain market share and lower profits for those that lose market share.
If market share is taken by reducing prices, it can reduce profits in the industry as a
whole.
The bargaining power forces are looked at in more depth in the next slide.

15 Bargaining power – the ability of a buyer or supplier to make more demands and take
more of the available profit for themselves.
When buyers’ bargaining power is strong, it means they are able to make more demands
on suppliers in respect of factors, such as product quality and product functionality. This
increases supplier costs and reduces their profitability.

Buyer power is strong when: (refer to diagram on slide)

• Buyers are more concentrated than sellers
• Buyer switching costs are low
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SLIDE TUTOR NOTES

• Threat of backward integration is high

• Buyers are price sensitive
• Buyers are well informed about the product or service
• The product or service is undifferentiated
• Buyers purchase in large volumes
• Substitutes for the product or service are available
• The amount purchased by the buyer is a significant proportion of the seller’s sales
If suppliers’ bargaining power is high then they can keep the price of their product or
service high and so retain more of the available profit.

Supplier’s bargaining power is strong when:

• There are no substitutes
• Suppliers are larger than firms in the industry and more concentrated
• The industry is not very important to the seller
• The seller’s product or service is an important part of the industry’s value chain
• The seller’s product or service is differentiated
• There are significant switching costs
• Sellers pose a definite threat of forward integration

Class discussion
Discuss some example scenarios and consider each of the points above to determine who
has the greater bargaining power.
You could start with domestic examples such as the following.
• Buyer wanting a hotel room for two nights in a capital city
• Buyer considering switching their utilities supplier from their existing one.
• Buyer deciding where to buy their groceries.
Then move onto industry examples, e.g., (or ask learners to supply scenarios from their
organisations)
• Buyer wanting to purchase a highly specialised 3-D printing machine.
• Buyer wanting to purchase security service for premises.

16 Information obtained from company annual reports (which include financial statements,
such as, the income statement) can be used to calculate costs.
• Direct costs can be calculated by subtracting the gross profit from the revenue for a
period.
• Indirect costs can be calculated by subtracting revenue from the net profit.

Fixed and variable costs can be calculated as follows.

• Obtain cost and output values for a number of similar organisations
• Plot them on a graph to find the line of best fit – this is the line that goes
approximately through the middle of the data points – refer to graph on slide
• The point where the line of best fit crosses the y-axis (where output is zero) is the
probable value of fixed costs for the industry.
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SLIDE TUTOR NOTES

• The slope of the line of best fit is the approximate variable costs for the industry.
Calculate by doing the following.
• Take a point at the right-hand end of the line of best fit and note its cost
and output levels.
• Divide the cost by the output and this gives an approximate figure for the
cost per unit of output or variable cost.
At this stage, the view could be taken that fixed costs are mostly indirect costs and variable
costs are mostly direct costs.

Learner activity
Prepare a worksheet that lists the cost and output values of around 15 organisations (they
can be fictional).
Learners to:
1. Plot values on a graph
2. Draw a line of best fit
3. Obtain estimates for probable fixed and variable costs.
Follow up with a class discussion to draw more conclusions from the graph.
• How close or far apart were the points plotted?
• What was the variance?
• What does this tell you?

17 • Purchasing budget estimates how much money will be spent on raw materials and
components, services and outsourcing for a period.
• Direct and indirect costs are used to construct a purchasing budget.
• Calculate the quantity of a raw material needed by the following.
• Budgeted number of units to be manufactured multiplied by the quantity
of raw material per item.
• To calculate the quantity of raw material that the organisation needs to buy in the
next year.
• Inventory at the start of the budget period + quantity needed for
production – the inventory needed at the end of the budget period
• Both of these figures can be obtained from the manufacturing budget and the bill
of materials.

If you have a thorough understanding of the cost build-up (direct and indirect costs) of the
item that the organisation buys, you can work with the supplier to identify ways to reduce
the cost (and therefore price) for both parties, without reducing quality. This is called
‘evidence-based negotiation’.
The following are some things to test with the supplier prior to purchase.
• Do any of the material or component costs look high? Is it because the supplier has
little negotiating power with its suppliers? Could any of the materials be swapped
to alternatives that cost less?
• What utilisation levels of the machinery used in manufacture have been assumed?
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SLIDE TUTOR NOTES

Is this reasonable given that there will be downtime for setting up machines and
for maintenance? Would a change in specification allow different machines to be
used that have a higher utilisation as this would give a lower unit cost?
• Is the manufacturing process different to what the organisation expected? Can its
own manufacturing engineers offer alternatives with or without a change to the
specification of the product?
• What batch sizes is the supplier using? Is the utilisation of machinery low because
of many short production runs? Can this be improved with better production
planning?
• What labour costs are involved? Are these appropriate for the type of process
being used? Are staff properly trained?
• What are the indirect costs for this product? On what basis have they been
apportioned to the product? Is this a fair basis? What is the supplier’s break even
point? Is the supplier over-recovering its costs?

18 Celine is the buyer for a large national chain of supermarkets.

She is tasked with negotiating contracts with well-known brands to ensure they have the
products that competitors will stock.

Discuss the following questions with a partner or in small groups, and write down your
answers:
1. Which industries will Celine be working with?
2. Carry out a Porter’s Five Forces analysis from the perspective of the supermarket
chain.
• Who will have the greater bargaining power: Celine’s organisation or the
suppliers?
• How high is the threat of substitution in this market?
• How high is the threat of new entrants?
3. How could Celine estimate the probable fixed and variable costs for the suppliers
she works with?

Learning Outcome 3: Understand the use of specifications in Procurement and

Supply
These notes are designed to support teaching staff using the CIPS Teaching Resources PPT slides. Teaching
staff are advised to cross reference against the relevant module content and learner resources (e.g. study
guide). Supplementary resources are available on cips.org in the Student Zone, CIPS Knowledge and Supply
Management online journal (www.cips.org).

SLIDE TUTOR NOTES

19 Not applicable

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SLIDE TUTOR NOTES

20 Class discussion
• What do you already know about each type of specification (refer to list on slide)?
• What type of information is contained in each one?
• Use the following to fill in any gaps in knowledge

Drawings/technical specifications
• Include:
• the standards for the quality of materials that should be used
• the quality of work needed in production
• any critical dimensions, chemical composition or allowable tolerances that
a product or service must meet.
• Examples of items that would have a technical specification: electrical
components, steel, chemicals, pharmaceutical drugs, etc.
• Can be produced by a national or governing body, e.g. BSI in the UK, or by
individual organisations
• Can be based on standards set by the ISO.
• Tip: ensure the specification isn’t so specific that it limits the number of suppliers
who are available to fulfil it.
• 2D or 3D drawings (often called engineering drawings or technical drawings) can
be used to complement the technical specification, e.g. when planning the
construction of buildings.

Conformance specifications
• Give precise details about how a product is to be made or a service is to be
delivered:
• provides in-depth detail for functional and non-functional requirements
• covers assumptions, constraints, performance, dimensions, weights and
reliability.
• Supplier must conform to this; there is no scope for supplier innovation.

Performance specifications
• Defines the performance that’s required, rather than how it should be achieved.
• Gives suppliers the freedom to choose the materials they use and the
manufacturing process or delivery process they think is best to solve the problem.
• Three types of performance specification:
• Outcome specification - identifies what needs to be achieved (the
outcome) and the capabilities required to achieve the outcome. The
process and inputs are left to the suppliers to determine.
• Output specification - assumes that the outputs will deliver the outcome
even if the outcome is not formally measured. The output is a deliverable
that can be measured in terms of time to deliver, quality and cost.
• Statement of works specification - commonly used to support an output or
outcome specification in projects and services. Defines the activities,
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SLIDE TUTOR NOTES

deliverables and timelines for services provided.

• They can also define any materials or other items needed to complete the project
or service.

Learner activity
• Consider some of the needs within your organisation/you’re responsible for
sourcing.
• Identify one or two examples of items that are produced using each of the types of
specification.
• What do they have in common?
Lead class discussion to check and compare learners’ answers.

21 Key sections of specifications

Definition
• Defines the user requirements. Errors, or lack of clarity at this stage can result in
problems in delivering through life management.
• When drawing up a definition for a through-life specification, produce a User
Requirements Document (URD) by asking open-ended questions, e.g.:
• What is this product or service for?
• Who will be the users of it?
• What problem will this solution solve?
• Make sure that the functions, attributes, constraints, preferences and expectations
for the product or service are fully explored and any trade-offs between them are
agreed.
• There should be sufficient information in the specification to allow the contractor
to quickly and accurately develop a price for the product/service and to minimise
risk later in the through life contract.

Description of the requirement

The nature of the description is determined by the type of specification.
• A conformance specification will be a precise set of instructions to which the
supplier must comply
• An output specification will consist of a description of clear functions and the
performance required
• An outcome specification will have a broad description of the end results and
vision for delivery. (Focus on the key needs of the user to prevent the list getting
too long and unmanageable. Don’t suggest a solution.)

Acceptance testing
• Used to determine whether a product meets its specification before it’s released
to a customer. Should answer the following questions:
• ‘Did we build the right thing?’
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SLIDE TUTOR NOTES

• ‘Is this what the customer really wanted?’.

• May involve physical tests, chemical tests or performance tests.
• If the product/service meets the standards then it’s passed as suitable for use by
the customer. If not, it’s rejected and corrective action will need to be taken by the
contractor.

Change control – covered on next slide

Environmental factors – the way the organisation seeks to minimise its impact on the
environment, covers, e.g.
• Recovery from natural disasters
• Management of waste emissions
• Pollution
• Energy efficiency

Social criteria – the way the organisation seeks to protect and empower local workforces
and communities, e.g. by paying a living wage, by providing suitable working conditions,
etc.

Learner activity
Take a look at a specification produced by your organisation.
Identify the different parts of the specification:
• Is the definition clear, or is there room for misunderstanding?
• How is the requirement described? What sort of specification is used?
• What method of acceptance testing is to be used? What is required in order for the
product/service to pass?
• What social and environmental criteria are included?

22 • Change is inevitable during the delivery of any contract, e.g. stakeholders change
their minds, new regulations are introduced and new technology is released.
• Change management or change control process - a way to authorise and make
changes but without so many changes that the deliverable gets derailed.
Steps in a formal change-control process (refer to diagram on slide):
• Identify and describe the change needed and the reason for the change. Include
the impact it will have on the project timescales, and the difference the customer
will see.
• Review and discuss the change with the whole project team to determine if it will
be accepted, amended or rejected.
• Document any options for the proposed change together with any data that
supports the preferred change and the options put forward.
• Formally approve or reject the change with input from key stakeholders. Any
approved changes are then incorporated into a revised specification and updated

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SLIDE TUTOR NOTES

project plans.

Learner activity
Ask learners to think about a contract that they or a colleague managed where there was
change – could be a series of small changes, or one large change – then discuss with a
partner:
• What the contract was for
• The nature of the changes
• The impact of the change
• How the change was managed
• What you’ve learned from this (e.g. a great demonstration of best practice to
follow next time, or what to avoid in the future)
Lead a class discussion to share examples and lessons learned.

Follow-up activity
Find out what change control processes are used in your organisation, if you’re not already
aware of them.
Obtain a copy of your organisation’s CSR policy and understand what social and
environmental factors it addresses.

23 Process for identifying risks in specifications – refer to diagram on slide

• Identify the possible risks
• Assess those risks
• Control the risks
• Monitor the risks
A key risk in specifications is incorrectly identified needs. There are three ways in which
problems can arise:
Under-specified needs
• Can arise when not all of the users have been identified and therefore not all of
the requirements have been identified and assessed.
• Associated risks include:
• a product or service that isn’t able to meet user needs
• cost of rectifying the issue or procuring an alternative
• a product or service that isn’t used to its full potential due to not fulfilling
users’ needs.
Over-specified needs
• Can arise when users give the writer a long wish-list of their needs to be included.
• Associated risks include:
• greater expense of developing a product/service with more features
• poor competition because the number of suppliers who can provide the full
specification is fewer than if the specification had not been over-specified
• a variety of offers that each provide only some of the features specified
because few are able to supply the full range of features, which makes it
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SLIDE TUTOR NOTES

difficult to evaluate the offers.

Misinterpreted needs
• Can arise when specification writers and suppliers misunderstand what the users’
needs are
• Associated risks include:
• Unacceptable purchase that does not meet the needs of the user
• Time overrun as the product/service has to be adapted to meet the
emerging real needs
• Increased costs from re-work to adapt the product/service to the real need.
Learner activity
Discuss in pairs – have you experienced problems as a result of the level of detail in a
specification?
• What was the issue?
• What caused it?
• How was it resolved/managed?
• What was the outcome? (e.g. delayed release to customer, increased costs, etc.)
• What can you learn/have you learned from this?
Take a look at a specification you’ve worked on recently. Analyse it to determine if there is
risks of an over-specified, under-specified or misrepresented need.

24 Standardisation can be implemented at three levels

Product standardisation:
• no variations which results in longer or unbroken production runs
• reduces costs
• reduces the complexity of operations in terms of production processes for
products and delivery processes for services.
• helps to improve quality as there are fewer products and fewer components to
deal with.

Processes or production method standardisation: (refer to diagram on slide)

• allows batch production or even continuous manufacturing.
• reduces unit cost environment of a job shop

Parts standardisation:
• reduces costs of manufacturing and logistics
• increases the flexibility of manufacturing operations and delivery times to
customers
• frees up people to focus on more value-added activities rather than spending time
on activities such as inventory management.
• The zero-based approach – start with ‘nothing’ and only add in parts that are
needed

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SLIDE TUTOR NOTES

Standardisation at one or more of these levels can result in:

• cost reduction through purchasing leverage
• reduction of inventory
• improved quality flexibility and responsiveness.

In service industries, standardisation can help to achieve a lower-cost and higher-quality

service to customers.

Learner activity
Does your organisation implement standardisation at any of these levels?
Discuss examples in small groups.
Are there any trends/similarities you notice? (prompt: is there standardisation of
component parts, but variation in end products, etc.?)

25 Target costing – a common way to identify the costs associated with an activity.

Four step process.

• Decide on the selling price the market will accept. In many industries such as
healthcare, construction and fast-moving consumer goods (fmcg) competition is so
fierce that sellers become price takers rather than price makers.
• Decide the minimum profit level that is acceptable.
• Take the profit from the selling price to arrive at the target cost.
• Start a project to identify ways to reduce the current actual costs to the target level
(refer to diagram on slide)

Learner activity
Undertake a target costing exercise on an item that you’re responsible for in your
organisation.
Is there room to reduce current costs?

26 • Value engineering – applying value analysis to new products and services.

• Value analysis – critically assessing every feature of an existing product to ensure
that its cost is no greater than is necessary to carry out its functions.
The way the presence or absence of functions affects customer satisfaction is shown on
the graph on the slide

Kano model
Used in value engineering to decide which functions a new product or service should have
based on customer preferences.
Can help to deliver functions that delight customers and go beyond their expectations
without adding undue costs from having too many functions.
Identifies five types of requirement:
• Attractive requirements – a product or service that meets these requirements are
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SLIDE TUTOR NOTES

more likely to attract more customers and create differentiation from competing
offers from rivals. However, this does not mean that the product or service will be
rejected by customers if it does not meet these requirements.
• Example: free parking offered by a department store
• One-dimensional or performance requirements - the more that these
requirements meet the customer’s needs and the higher the level of performance
of the product or service, the more satisfied a customer will be. The converse also
holds true.
• Example: the more legroom between seats on an aircraft, the happier the
customer.
• Mandatory requirements - functions and their characteristics that customers
definitely want, and they will be dissatisfied if they are not present in the product
or service.
• Example: a restaurant needs to demonstrate that it complies with all food
hygiene standards
• Indifferent requirements - functions of a product or service that are of little or no
relevance to a customer and so do not influence whether or not that particular
firm’s product or service is selected.
• Example: the colour of wires inside a radio
• Reverse requirements - functions that are perceived negatively by customers and
so they have a reverse effect.
• Example: a restaurant that’s so popular that there is always a long waiting
list for bookings.
Method:
Survey potential customers and ask them two questions about each function or
requirement.
• Rate the product/service if it had this attribute
• Rate the product/service if it did not have this attribute

Answer options for each question:

• Satisfied
• Neutral
• Dissatisfied
• Do not care

Learner activity
Present learners with a simple scenario, e.g. a vehicle to transport them from one city to
another.
Ask them to work in small groups to discuss the scenario and draw up a list of pairs of
questions as used in the Kano process.
Learners to survey learners from other groups to obtain answers, then analyse the results
to determine the attractive, one-dimensional/performance, mandatory, indifferent and
reverse requirements.
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SLIDE TUTOR NOTES

27 Jaco is responsible for the leisure centre facilities in his local authority.
The current contract with the supplier that looks after the maintenance and cleaning of
the facilities is coming to an end.
There have been regular complaints from customers about the standard of cleanliness in
the changing rooms, and Jaco knows the price charged by the current supplier is not the
most competitive.
He therefore needs to write a specification as part of the tender process to find a new
supplier to take over this contract.
In groups, discuss the scenario and the following questions, and record your own answers.
1. What type of specification should Jaco use for this need?
2. What can Jaco do at the specification stage to reduce the likelihood of issues
arising in the delivery of the contract?
3. Describe one method that Jaco could use to reduce costs, improve efficiency and/or
improve customer satisfaction.

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