Tenth Edition

Procurement and Supply Chain

Management

KENNETH LYSONS
MA, MEd, PhD, Dipl.PA, Ac.Dip.Ed.,
DMS, FCIS, FCIPS, FInst M, MILT

BRIAN FARRINGTON
BSc(Econ), MSc, PhD, FCIPS

Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney
Dubai • Singapore • Hong Kong • Tokyo • Seoul • Taipei • New Delhi
Cape Town • São Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan
 Contents

Preface xvi
Acknowledgements xvii
Publisher’s acknowledgements xviii
Plan of the book xxviii

Part 1 Introduction and strategy 1

1 The scope and influence of procurement 3
Learning outcomes 3
Key ideas 3
Introduction 4
1.1 How to define procurement 4
1.2 How to define supply chain management (SCM) 5
1.3 Strategic roles of procurement 5
1.4 Procurement as organisational buying 7
1.5 The strategic scope of procurement 9
1.6 Integrated supply chain management 12
1.7 Procurement and change 16
1.8 World-class procurement 17
1.9 The status of procurement and supply management (PSM) 19
1.10 Reflections on procurement positioning in business 26
1.11 The scope of procurement in the public sector 26
Discussion questions 26
References 27

2 Strategic procurement 29
Learning outcomes 29
Key ideas 29
Introduction 30
2.1 Strategic fit between the supply chain and competitive strategies 32
2.2 What is strategy? 32
2.3 Strategy development 33
2.4 Levels of organisational strategy 35
2.5 Corporate strategy 35
2.6 Growth strategies 36
2.7 Business-level strategy 38
2.8 Strategic management 41
2.9 Strategic analysis 41
2.10 Important environmental factors 42
2.11 Internal scrutiny 44
2.12 Strategy formulation 45
2.13 The evaluation of alternative strategies 49

vii
Contents

2.14 Strategy implementation 58

2.15 Post-implementation evaluation, control and review 61
2.16 Strategic procurement and supply chain process models 63
Discussion questions 67
References 68

3 Logistics and supply chains 70

Learning outcomes 70
Key ideas 70
Introduction 71
3.1 What is logistics? 71
3.2 Materials, logistics and distribution management 72
3.3 Reverse logistics 76
3.4 Supply chains 77
3.5 Supply chain management (SCM) 81
3.6 Supply chain vulnerability 88
3.7 Value chains 89
3.8 Value chain analysis 92
3.9 Supply chain optimisation 94
3.10 Procurement positioning within supply chain management 98
Discussion questions 100
References 101

4 Organisational and supply chain structures 103

Learning outcomes 103
Key ideas 103
Introduction 104
4.1 Organisational structures 104
4.2 New type organisations 112
4.3 The organisation of the future 112
4.4 Factors in configurations 117
4.5 Lean organisations 118
4.6 Agile organisations and production 121
4.7 Supply and value chain mapping 123
4.8 Types of change 128
4.9 Centralised procurement 132
4.10 Decentralised procurement 134
4.11 Cross-functional procurement 134
Discussion questions 137
References 138

5 Procurement policies, procedures and support tools 141

Learning outcomes 141
Key ideas 141
Introduction 142
5.1 Exemplar Procurement Policy – The Crossrail Project 142
5.2 Procurement procedures 145
5.3 Procurement process failures 147
5.4 E-commerce, e-business, e-SCM and e-procurement 148
5.5 The evolution of e-procurement models 152
viii
 Contents

5.6 Electronic data interchange (EDI) 152

5.7 E-hubs, exchanges, portals and marketplaces 158
5.8 E-catalogues 160
5.9 E-auctions 163
5.10 Reverse auctions 164
5.11 E-payment 169
5.12 Low-value purchases 169
5.13 Procurement manuals 171
5.14 Procurement playbook 173
Discussion questions 176
References 177

Part 2 Strategy, tactics and operations 1: Procurement factors 179

6 Supplier relationships and partnering 181
Learning outcomes 181
Key ideas 181
Introduction 182
6.1 Relationship procurement and procurement relationships 182
6.2 The application of power in relationship management 182
6.3 Supplier relationship management – strategic focus 183
6.4 The contrast between transactional and relationship
procurement, taking account of contractual requirements 185
6.5 Collaborative business relationships 185
6.6 SRM model 189
6.7 Models of supplier relationships 189
6.8 Supplier relationship management – a critique 198
6.9 The termination of relationships 200
6.10 Relationship breakdown on an IT project 202
6.11 Further aspects of relationships 205
Discussion questions 205
References 206
7 Legal and contractual management 207
Learning outcomes 207
Key ideas 207
7.1 The procurement specialist and Contract Law 208
7.2 Formation of a contract 208
7.3 Acceptance 211
7.4 Contracts for the Sale of Goods 213
7.5 Contract for the Supply of Services 214
7.6 Consideration 215
7.7 Capacity to Contract 216
7.8 Drafting the detail of contract clauses 217
7.9 Misrepresentation 218
7.10 The right to terminate a contract 220
7.11 HOT TOPICS 222
7.12 Standard Forms of Contract 230
Discussion questions 231
References 232
ix
Contents

8 Quality management, service and product innovation 234

Learning outcomes 234
Key ideas 234
8.1 What is quality? 235
8.2 Quality systems 236
8.3 Total quality management 238
8.4 Specifications 240
8.5 Alternatives to individual specifications 243
8.6 Standardisation 248
8.7 Variety reduction 252
8.8 Quality assurance and quality control 253
8.9 Tests for quality control and reliability 253
8.10 The cost of quality 265
8.11 Value management, engineering and analysis 266
Discussion questions 277
References 279

9 Matching supply with demand 281

Learning outcomes 281
Key ideas 282
9.1 Inventory, logistics and supply chain management 282
9.2 Reasons for keeping inventory 284
9.3 Inventory classifications 284
9.4 Scope and aims of inventory management 285
9.5 Some tools of inventory management 286
9.6 The economics of inventory 291
9.7 Inventory performance measures 292
9.8 Safety stocks and service levels 293
9.9 The right quantity 296
9.10 The nature of demand 296
9.11 Forecasting demand 298
9.12 ‘Push’ and ‘pull’ inventories 303
9.13 Independent demand 304
9.14 Dependent demand 307
9.15 Just-in-time (JIT) 308
9.16 Materials and requirements planning (MRP) 314
9.17 Manufacturing resource planning (MRP II) 318
9.18 Enterprise resource planning (ERP) 319
9.19 Supply chain management systems 322
9.20 Distribution requirements planning (DRP) 322
9.21 Vendor-managed inventory (VMI) 324
9.22 Procurement and inventory 327
Discussion questions 327
References 329

10 Sourcing and the management of suppliers 330

Learning outcomes 330
Key ideas 331
10.1 What is sourcing? 331
10.2 The strategic sourcing process 332
x
 Contents

10.3 Sourcing information 333

10.4 Analysis of market conditions 334
10.5 Directives 336
10.6 E-sourcing 338
10.7 Supplier evaluation 338
10.8 Supplier approval 348
10.9 Evaluating supplier performance 349
10.10 Policy issues in sourcing 352
10.11 The supplier base 353
10.12 Outsourcing 354
10.13 Make vs buy 361
10.14 Sub-contracting 365
10.15 Partnering 367
10.16 Intellectual property rights 378
10.17 Procurement management of IPRs 379
10.18 Procurement support for in-house marketing 379
10.19 Intra-company trading 381
10.20 Procurement consortia 382
10.21 Sustainability 383
10.22 Sourcing decisions 384
10.23 Factors in deciding where to buy 386
Discussion questions 388
References 390

11 Purchase price management and long-term cost-in-use 393

Learning outcomes 393
Key ideas 393
11.1 What is price? 394
11.2 Strategic pricing – an introduction 394
11.3 The buyer’s role in managing purchase prices 395
11.4 Supplier pricing decisions 406
11.5 The supplier’s choice of pricing strategy 406
11.6 Tender pricing 408
11.7 Price and cost analysis 409
11.8 Competition legislation 414
11.9 Collusive tendering 416
11.10 Price variation formulae 417
Discussion questions 419
References 421

Part 3 Public sector procurement and sustainable procurement 423

12 Public sector procurement 425
Learning outcomes 425
Key ideas 425
Introduction 426
12.1 Understanding the context of public procurement 426
12.2 Procurement – an integral element of the commissioning cycle 428
12.3 The complexity and nature of public sector expenditure 429
xi
Contents

12.4 Public Accounts Committee 430

12.5 Procurement of goods and services 430
12.6 EU financial thresholds 432
12.7 OJEU minimum timescale 432
12.8 Public procurement procedures 433
12.9 Pre-qualification to supply a public sector organisation 435
12.10 Tender evaluation 437
12.11 The Legal context of challenges to public sector contract award 439
12.12 Public sector risk 443
12.13 Public sector procurement fraud 444
12.14 Aviation Department Fraud – United States 445
12.15 Mighty River Power Ltd Fraud – New Zealand 446
12.16 The Fat Leonard Case USA 446
12.17 Public sector projects – procurement learning 447
12.18 Conclusion 447
Discussion questions 448
References 448

13 Sustainability and socially responsible procurement 450

Learning outcomes 450
Key ideas 450
13.1 What is sustainability procurement? 451
13.2 Sustainable Procurement Strategy 451
13.3 Sustainability as an objective in corporate strategy 453
13.4 Sustainable Procurement Policy 453
13.5 Sustainable Procurement Guide 454
13.6 Supply chain compliance 456
13.7 What is Social Value? 457
13.8 ISO 14001:2015 Environmental management systems 458
13.9 BS ISO 20400:2017 Sustainable Procurement 458
13.10 ISO 14031:2015 Environmental Management –
Environmental performance evaluation: guidelines 460
13.11 Environmental impact of computers 461
13.12 Addressing environmental issues during the
procurement process 461
13.13 Pre-qualification questionnaire – sustainability implications 463
13.14 New models for sustainable procurement 464
13.15 Environmental technical specifications 465
13.16 Sustainability achievements in public procurement 465
13.17 European Directive on clean energy-efficient vehicles 466
13.18 Contractual Implications of environmental and
related considerations 467
13.19 Sustainability challenges for procurement 468
13.20 Multinational enterprises 469
13.21 The Kyoto protocol 469
13.22 Conclusion 470
Discussion questions 470
References 471

xii
 Contents

Part 4 Strategy, tactics and operations 2: Operation and

strategic performance 473
14 Project procurement and risk management 475
Learning outcomes 475
Key ideas 475
Introduction 476
14.1 The project lifecycle 477
14.2 The project procurement strategy 480
14.3 Role of procurement 484
14.4 PRINCE 2® 484
14.5 Project management issues 486
14.6 Project risk management 487
14.7 Corporate benefits of world-class project procurement 488
14.8 Project risk register 489
14.9 Project audit 489
14.10 Procurement management 494
Discussion questions 500
References 501

15 Global sourcing 503

Learning outcomes 503
Key ideas 503
15.1 Terminology 504
15.2 Motives for buying offshore 504
15.3 Sources of information for offshore suppliers 506
15.4 Overcoming challenges when sourcing offshore 506
15.5 Incoterms® 511
15.6 Customs and Excise 514
15.7 Transport systems, costs and considerations 515
15.8 Freight agents 517
15.9 Methods of payment 519
15.10 Countertrade 521
15.11 The true cost of offshore buying 524
15.12 Global sourcing – Boeing case study 525
15.13 Buying capital equipment offshore 528
15.14 Factors in successful offshore procurement 529
Discussion questions 530
References 530

Part 5 Strategy, tactics and operations 3: Negotiation skills, contract

management, category and world class procurement 533
16 Negotiation skills, practice and business benefits 535
Learning outcomes 535
Key ideas 535
Introduction 536

xiii
Contents

16.1 Approaches to negotiation 539

16.2 The content of negotiation 541
16.3 The negotiator’s authority 544
16.4 The negotiation process 548
16.5 Pre-negotiation 548
16.6 The actual negotiation 554
16.7 Post-negotiation actions 559
16.8 What is effective negotiation? 559
16.9 Negotiation and relationships 560
16.10 Negotiation ethics 560
Discussion questions 565
References 565

17 Contract management 567

Learning outcomes 567
Key ideas 567
Introduction 568
17.1 The pre-contract award activities impact on contract management 568
17.2 The contract manager’s role, skills and knowledge 570
17.3 Contract management good practice (including VFM) 573
17.4 Contract management plans 574
17.5 Key performance indicators (KPIs) for contract management 578
17.6 Lapses in contract management 582
17.7 Social services contract monitoring audit 583
17.8 Contract provisions 586
17.9 Contract clauses and what they mean 587
Discussion questions 588
References 589

18 Category and commodity procurement 590

Learning outcomes 590
Key ideas 590
Introduction 591
18.1 Defining categories 591
18.2 Illustrations of category management issues 592
18.3 The talent challenge 594
18.4 Category management – corporate travel 594
18.5 Category management – ICT 598
18.6 Capital investment procurement 599
18.7 Production materials 611
18.8 Raw materials 612
18.9 Futures dealing 613
18.10 Methods of commodity dealing 617
18.11 Procurement of non-domestic gas and electricity 621
18.12 Energy regulation 621
18.13 Energy supply chains in the UK 621
18.14 Markets 622
18.15 Pricing 623
18.16 Procuring energy contracts 624
xiv
 Contents

18.17 Energy consultants and management 626

18.18 Component parts and assemblies 627
18.19 Consumables and MRO items 627
18.20 Construction supplies and bills of quantities 628
18.21 Procurement of services 631
Discussion questions 636
References 637

19 World-class procurement to enhance business performance 638

Learning outcomes 638
Key ideas 638
19.1 Innovation and supplier continuous improvement 639
19.2 Innovation 640
19.3 Environmentally sensitive design 641
19.4 Procurement involvement in product development 643
19.5 Supplier development 644
19.6 Procurement research 646
19.7 Procurement performance evaluation 649
19.8 Accounting approaches 653
19.9 The procurement management audit approach 654
19.10 Benchmarking and ratios 659
19.11 Integrated benchmarking 661
19.12 Procurement ethics 663
19.13 Ethical issues relating to suppliers 664
19.14 Ethical codes of conduct 667
19.15 Procurement and fraud 670
19.16 Cyber security 677
Discussion questions 685
References 687

Appendix 1: Code of ethics–Your commitment to the profession 690

Appendix 2: CIPS Code of Conduct (Adopted September 2013) 692
Definitions, acronyms and foreign words and phrases 694
Index of names and organisations and some publications mentioned in the text 700
Subject Index 706

Supporting resources
Visit go.pearson.com/uk/he/resources to find valuable online resources

For Instructors:
■ Comprehensive Instructor’s Manual containing teaching tips and notes on case studies for
each chapter
■ Downloadable PowerPoint slides containing figures from the book

For more information please contact your local Pearson Education sales representative or
visit go.pearson.com/uk/he/resources

xv