L3M1 SUMMARY NOTES

CHAPTER 1 PROCUREMENT IN THE PRIVATE SECTOR

1 DEFINING AND CLASSIFYING ORGANISATIONS
Organisation is a social arrangement for the controlled performance of collective goals
Market economy: production of g/s and the prices paid for them are determined by
unrestricted competition between privately owned businesses- economy operates on demand
and supply – no public sector
Centrally planned: all economic activity is controlled by central govt, no private sector,
associated with communist states- doesn’t work in practice due to essential g/s
Mixed economy: mix of private + public sector organisation, the balance of a mixed economy
will depend on political factors
Third sector: to achieve a defined objective
2 PRIVATE SECTOR ORGANISATIONS
Sole trader: profit, not incorporated, one owner but can have any no. of employees, usually a
small business due to limited funds, owners personal funds, retained proft, borrow from
bank/friends/family
Partnership: profit, not incorporated, 3 type: general/traditional (similar to sole trader),
limited (1 or more sleeping partners), limited liability (LLP accountants/lawyers), 2 or more
owners (partners), unlimited if traditional or limited if LLP, owners personal funds, retained
profits reinvested, borrow
Limited company: for profit, incorporated, owned by shareholders, limited liability, money
raised by issuing shares, reinvestment of retained profit, borrow
PLC: offer shares to general public + trade on stock exchange vs LTD shares cannot be sold
to general public, less regulation than PLC
Unincorporated companies: e.g. sole traders and general partnerships- associations of
individuals formed of particular NFP purpose e.g. clubs in 3rd sector + companies where
owners liable for debts of their org. also - SMEs + MNCs (strategic business units)
3 OBJECTIVES OF PRIVATE SECTOR ORGANISATIONS
Profitability, market share, shareholder value, non-profit objectives, CSR
4 THE REGULATION OF PRIVATE SECTOR PROCUREMENT
Influence of govt: operation of orgs., cost and revenues incurred by org., actions they take in
pursuing macroeconomic objectives, values + norms regarded as acceptable
Regulation of privatised firms: limiting price rises, publicity, issuing + renewing licenses,
setting standard for good practice, monitoring activities of firms, making period reports to
govt
5 THE ROLES OF PROCUREMENT AND SUPPLY – brand values + positioning,
alignment with suppliers, innovative supply chain approaches e.g. ESI, E-procurement etc.
CHAPTER 2 PROCUREMENT IN THE PUBLIC SECTOR + THIRD SECTOR
1 DEFINING THE PUBLIC SECTOR
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Central govt, local govt authorities, state-owned businesses, public corps e.g. BBC, municipal
enterprises e.g. local leisure services, QUANGOs e.g. CMA
Financing public sector through: direct/indirect taxes
Functions: to deliver essential public services, to encourage national + community
development, to pursue socio-economic goals
2 THE IMPACT OF ECONOMIC SECTOR ON PROCUREMENT
Public sector buyers may not be seeking to maximise profit but VFM, fulfil terms of
customer charter, CSR
3 THE ROLES OF PROCUREMENT AND SUPPLY IN THE PUBLIC SECTOR
Supply chain drivers: Achieving defined service levels, less intensely competitive
environment allows greater information exchange, diverse range of stakeholders -> complect
network of stakeholder expectations, wider diversity of items + services, high level of
accountability, compulsory use of competitive bidding
Commissioning: procurement of a major public service or public works often provided by private
sector supplier
Public accountability: cases of overspending + delayed projects attract media attention,
creates ‘risk avoidance’ – lack of flexibility + innovation
VFM: 3Es – economy, efficiency, effectiveness
4 THE REGULATION OF PUBLIC SECTOR PROCUREMENT
To protect public welfare + national interest, ensure compliance with institutionalised
standards + ensure taxpayers money is well spent
5 THIRD SECTOR ORGANISATIONS
e.g. charitites churches, political parties, musuems, clubs + associations, co-ops, interest
pressure + advocacy groups, trade unions, professional bodies such as CIPS Voluntary vs
subscription paid
Objectives: raising public awareness, political lobbying, raising funds, providing material aid
+ services to the public/specific beneficiaries, providing services to members, mobilising +
involving members of public in community projects
6 KEY FEATURES OF 3RD SECTOR PROCUREMENT
Public accountability- stewardship, values of internal + external stakeholders, need to align
procurement policies + procedures with core values, reputation, limited funds
CHAPTER 3 PRICING ARRANGEMENTS

1 DEFINING THE RIGHT PRICE - ‘The value of a commodity or service measures in terms of the
standard monetary unit’
Supplier may provide buyer with pricing schedule- list of fixed prices on range of p/s
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2 PRICING ARRANGEMENTS

Firm price agreement: all-inclusive price for a contract which will not change – relatively little risk of cost
variation e.g. prices set per volume delivery, or fees per person per hour (cleaning services)
Lump sum contract: for major contracts when buyer+ contractor agree fixed sum to complete project by a
given date, may include a CPA usually based on agreed cost indices

3 FIXED PRICING ARRANGEMENTS

Fixed price: all-inclusive price for contract that will not change for specified length of time, but element of
price may be varied after agreed period using pricing mechanism or formula in contract- if additional
requirements are added or project component removed, supplier to request some relief for losses arising
from escalating costs if customer has contributed to these cost
Fixed price with CPA (FPCPA): A fixed price set with provision for upward of downward revision in the
occurrence (or non-occurrence) of specified contingencies through insertion of CPA clause – actual
increases or decrease in material, labour, commodity, energy or fuel, links to specified indices relevant to
supply market chain
Indexation + Price adjustment formulae: BEAMA formula calculates likely variation of labour + materials
costs based on industry average data throughout contact period as a % of total agreed contract price
Fixed price with review/re-determination clauses: CPA clause at end of specified period or at specified
intervals price will be amended or opened to review/re-negotiation in light of cost fluctuations, supplier
performance + contingency factors
Level of effort term contracts: impossible to specify outcomes accurately/estimate costs e.g. R+D/software
development- provide specified level of effort over agreed period

4 INCENTIVISED + GAINSHARE PRICING - Incentivised: pricing included incentives for supplier to

perform better than basic T+C the contract requires e.g. stage payments, bonus, negotiated target cost vs
Gainshare: buyer + supplier share benefits from performance of a contract

5 COST-BASED PRICING ARRANGEMENTS

Cost plus pricing: a fixed % added to suppliers cost of production/delivery

CPFF: payment of allowed costs plus pre-determined fixed amount ( fee for doing the work)
CPIF: payment of allowed costs plus a higher fee for meeting or exceeding performance
CPAF: payment of allowed costs plus a fee (bonus) based on contractors performance
Alternative: cost without fee, cost sharing, time + materials
Target costing: estimate max selling P market willing to pay for, then work backward to calculate
production cost that must be achieved to provide reasonable profit + attacks costs to reduce them to
required level
Cost reimbursable pricing arrangements: aka cost-plus contract, the price paid for a contract consists of
allowable costs incurred by the supplier plus an agreed profit element

6 PAYMENT TERMS – in advance, on delivery, open account/credit, staged, open book costing + cost
transparency

CHAPTER 4 THE EXTERNAL ENVIRONMENT OF PROCUREMENT

1 DEFINING THE PROCUREMENT ENVIRONMENT

Internal environment: everything to do with organisation, micro environment: all stakeholders impacting
operations
Macro/external: wider factors in market, competition, economy, politics
Differences between local, national, international + global factors

2 WHY ANALYSE THE PROCUREMENT ENVIRONMENT

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Organisation as an open systems – a system which is connected to and interacts with its environments,
receives various inputs from environment + converts these into outputs to environment- feedback info
enables system to change behaviour to stay stable
Environmental change: economic opportunities + threats, changes in social values preferences
expectations, technology, laws + regulation
Environmental analysis: audit, assess, identify forces, identify opps + threats, formulate strategies
Environmental scanning: continually gathering + analysing intelligence from various sources/specialists –
monitor for changes trends threats and opps

3 THE STEEPLED ANALYSIS

(Details in other chapters) Technological: increasing speed + power of info, 24/7 global business activity,
new products + processes, shortening shelf life of products, changing industry structures + activities,
creating virtual teams + orgs

4 OTHER TOOLS OF ANALYSIS

Porter’s 5 forces:
Threats from new entrants: companies want to enter market because profit is high, existing businesses need
to respond by keeping prices low otherwise new entrants will continue to enter Suppliers
bargaining power: Only a few powerful suppliers, can exert power to keep supply prices high, means
higher costs + less profit for businesses
Buyers bargaining power: few powerful buyers, exert power to keep prices they pay low – limit profits for
businesses in the market
Threats from substitutes: if ready substitute product, prices remain low + profit restricted
Competitive rivalry within industry: fierce competition will keep prices + profit low

Market structures:
Perfect competition: many producers with no market power, only one price determined by D + S
Monopoly: one producer with all market power, no competition
Monopolistic competition: many producers with differentiated goods- little market power
Oligopoly: few producers with high market power to set prices- work together to keep P stable

Demand (falls when P rises) and Supply (rises when P rises)

Product lifecycle (can also be saturation stage+ extension stage:

1) Development: no revenue, losses from capital investment + daily spending

2) Introduction: low sales, volume low so unit costs high, still losses
3) Growth: revenue increases, unit costs fall, becomes profitable, competition restrict P
4) Maturity: revenues peak, unit cost lowest, profit highest, competition highest
5) Decline: revenues fall, profits fall, P falls/cost rise

CHAPTER 5 ECONOMIC FACTORS

1 THE ECONOMIC ENVIRONMENT

Macro- study of whole economy vs micro individual markets, products and firms
National economic policies: achieve sustainable growth in economy, control inflation, low u/e,
balance of payments
Monetary policy: interest rates + supply of money vs Fiscal policy: tax revenue + public expenditure
Impact on procurement: wealth of a nation, strength of an economy + extent of business confidence,
availability of labour/labour costs, supply costs, level of D + tax, more expensive imports, companies
borrowing to purchase large capital items – interest rate
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2 THE NATIONAL ECONOMY

GDP = C + I + G + (X-M)
Economic growth: annual % increase in GNP/GDP – measures of the level of output produced by
national economy
Interest rates: as IR rise, cost of borrowing rises (economic activity reduced) - but so do rewards for
saving, govt seek to manipulate IR to stimulate/slow demand = monetary policy
Inflation: inflation increase, ppl fear further P rises + seek higher wages + P to cover them creating
expectational inflation + vicious cycle = wage-price spiral

- Demand-pull: demand exceeds supply pushing prices up (reduce govt spending, higher taxes
to cut consumer spending (fiscal) + raise IR (monetary))
- Cost-push: increases cost of production w/o increased demand (apply controls over wage +
price rises, encourage increased productivity in industry e.g. tech dev.)
- Monetary inflation: overexpansion of monetary supply boost excess D (control/reduce bank
lending, maintain IR, achieve surplus balance of trade)

Employment: frictional, seasonal, structural, cyclical

3 THE BUSINESS CYCLE

1) Depression: low consumer D, P stable/falling, profits low, high u/e, confidence low
2) Recovery: consumer spending rises, P stable/rising, employment rise, conf grows
3) Boom: consumer spending rising fast, labour shortages so investment high, P rises
4) Recession: consumption falls off, production falls, u/e rise, profits fall, investmt fails

4 INTERNATIONAL ECONOMICS

Balance of payments include current transactions + capital transactions

BoP surplus: excessive D, upward pressure on P vs BoP deficit: erodes growth, force ER down,
imports higher domestically. Trading blocs, tariffs + non-tariff barriers to trade

5 EXCHANGE RATES – importers want high value but exporters want low value

6 MICROECONOMIC FACTORS – D +S for raw materials, components, services + end-products,

nature + strength of competition in market, position of products in lifecycle, technological
developments

CHAPTER 6 POLITICAL AND LEGAL FACTORS

1 THE POLITICAL ENVIRONMENT

Local govt authorities formulate olicies + bye-laws, national level- legislation + economic policy,
govt is nations largest supplier, politics of other nations, international institutions, political parties

2 LOCAL POLITICS AND NATIONAL POLITICS

Local: determining policies and rules and applying national laws within area, raising dunds via
taxes and allocating funds provided by central govt, administrating local authority services

National: legislature – people between elections + makes laws, executive- implements law +
policy in practice, independent judiciary- enforces law enacted by legislature
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Drivers + initiatives in national politics, political parties (+media), pressure groups+ interest
groups (causal, sectional, trade union, employer associations), political conditions in other
countires

3 GOVERNMENT POLICY + FUNDING

Government influence on business: economic policy, industry policy, environment +

infrastructure policy, social policy, foreign policy, public spendind on g/s
National government funding: grants for private sector businesses are available – specialist
consultancies exist to advise businesses whether they quality e.g. if operate in geographical
regions where government attempting to stimulate employment

4 INTERNATIONAL POLITICS + POLICIES

Trading blocs, WTO, OECD, G7

5 EMPLOYMENT LAW

Some aspect of employment relationship are governed by common law on contracts: principles
such as duty of care (in relation to H+S) snd so on. However this is an area that has been
increasingly addressed by statute law (legislation enacted by governments)

6 EQUALITY

Sex Discrimination, Equal Pay, Race Relations, Disability Discrimination, Employment Equality
Regulations
3 types of unlawful discrimination: direct, indirect, harrassment

7 HEALTH AND SAFETY AT WORK

Machinery + equipment maintained/fenced, floors/stairs properly constructed + maintained,

falling objects prevention, windows door gates made of safe materials, fire precautions should be
taken, manual handling operations, safe handling of hazardous chemicals, use of computer
workstations

CHAPTER 7 ENVIRONMENTAL FACTORS

1 THE NATURAL ENVIRONMENT

The weather, natural resources, impact of business on natural environment, specific issues of
environmental concern, governmental, pressure group + public concern + pressure applied on
organisations

Impact on procurement: increasing consumer concern place pressure on orgs to adapt products
and processes to be more environmentally friendly, government policy + legislations creates
compliance issues, financial penalties for poor environmental performance, costs of natural
resources/commodities rising as S falls, cost savings through being sustainable, natural events

2 CURRENT ENVIRONMENTAL CONCERNS

Increasing depletion of non-renewable resources, challenge of keeping renewable resources

productive, challenge of finding new resources – loss of biodiversity too
Environmental damage: destruction of rainforests, industrial pollution, discharge + disposal of
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waste products
Climate change: need to reduce CO2 emissions and carbon footprint e.g. carbon offsetting,
carbon labelling
Paris Agreement – reduce global temp by 1.5

3 PRESSURE FOR ENVIRONMENTAL RESPONSIBILITY

Environmental law + regulation: direct regulation (permits/laws), offset or trading schemes,

voluntary or negotiated agreements jointly agreed by businesses, education + advice
Pressure groups (Greenpeace, WWF) + green consumerism (willingness of consumers to choose
products, brands, providers on basis of environmental responsibility

4 ENVIRONMENTAL POLICY

Benefits: stave off more demanding + intrusive legislative requirements + regulation, give org.
clarity + unity of direction, reputation for environmental responsibility. Enhance orgs.
attractiveness as an employer, avoid pressure group/consumer boycott

5 THE CONTRIBUTION OF PROCUREMENT TO ‘GREEN’ BUSINESS

Contribution of procurement staff:

- Acting as interface between suppliers + product development + design to encourage

knowledge research + innovation for greener product specs + processes
- Gathering + presenting info on LT cost reduction, risk management + sustainability
benefits to secure stakeholder buy-in
- Ensuring compliance with buyers environmental standards
- Sourcing materials + services for environmental protection + reclamations

CHAPTER 8 SOCIAL + ETHICAL FACTORS

1 THE SOCIO-CULTURAL ENVIRONMENT

Demographics, socio-economics, social infrastructure, culture, ethics, consumer trends +

fashions, HRM
Impact on procurement: availability of skilled labour resources, attitudes and behaviours of
suppliers, how staff can be motivated + managed, pressure to adopt to E-procurement, barrier to
international sourcing, hamper effective communication and collaboration within a multi-cultural
procurement team

2 CULTURAL FACTORS

Culture is shared ways of behaving and understanding that are distinctive to a particular group of
people
Elements of culture: outward expressions (observable), values + beliefs, underlying assumptions
(below the surface)
Outward expressions of culture: behaviour, artefacts, rituals
Organisational culture: pattern of beliefs and expectations shared by an organisations members
which produce norms that powerfully shape the behaviour of individuals and groups in the
organisation
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Impact of cultural factors on procurement: growing public concern about environmental + ethical
issues, fitness + health, use of personal electronic devices

3 DEMOGRAPHIC + SOCIO-ECONOMIC FACTORS

Demographics (ageing/youth/ethnically diverse/singe person households), population size, age

structure, regional distribution (cities/suburbs), gender, ethnicity, social units, socio-economic
class

4 CORPORATE SOCIAL RESPONSIBILITY + ETHICS

Business ethics: macro- globalisation, worker exploitation, impact of industrialisation on

environment (addressed by ETI), corporate- CSR, environmental protection and sustainability,
fair trading, impact minimisation + community investment, individual- fraud, discrimination
bribery covered by Code of conduct
Aspects of CSR: sustainability issues, environmental issues, ethical trading + business
relationships

5 SOCIO-CULTURAL FACTORS IN INTERNATIONAL SUPPLY CHAIN

Hofstede 5 dimensions of cultures: 1) power-distance 2) uncertainty-avoidance 3) individualism

4) masculinity 5) long term-orientation

Attitudes to women in business, negotiating + conflict styles, decision-making styles, gifts +

hospitality, business customs + formalities
Differences: working practices, working hours, legal + regulatory regimes, language,
communication infrastructure + tools, education + skill levels, business terms

CHAPTER 9 DOCUMENTATION IN PROCUREMENT + SUPPLY

1 AN OVERVIEW OF PROCUREMENT DOCUMENTATION

Purchase requisition or bill of materials, spec/SLA, supplier appraisal questionnaire, RFQ/ITT,

supplier quotation/bid/tender docs, PO, acknowledgment of order, delivery note, goods received
note, quality inspection forms

2 REQUISITIONS

Used by procurement department to translate the users requirement into a purchase order

Content: serial number, internal department code, name + signature of the originator of the
requisition + date, description of p/s required. Quantity, supplier, delivery address, date required

3 PURCHASE ORDERS

Constitutes a legal offer to buy p/s, acceptance of PO by seller forms one-off contract – no
contract exists until PO is accepted

Low-value purchases: spend analysis of items most frequently purchased will highlight those
with regular transactions, stores systems can be used where identified items will be ordered in
large quantities and held in stock to be called off. Purchasing cards + e-commerce can also be
used
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Individual PO: maintain an ongoing record in numerical sequence of PO issued, record serves as
a detailed list + summary of the commitments that one person +/or entire departments is
responsible for

Contents: title of doc, name address + contact details of buyer, serial number + date of document,
name + address of supplier/vendor, description of items required with suppliers product quotes if
knows, quantity of items requires, unit price of items required + total price

4 DELIVERY NOTES

Sent by supplier to customer to inform him that goods he ordered have been despatched

5 INVOICES

Establishes obligation on the part of the purchaser to pay

Content: date, names + addresses of customer and supplier, contact names, description of items
purchases, price of goods, due date for payment

6 OTHER DOCUMENTS

Specs, SLAs, RFQ/ITT, supplier quotation/bid/tender docs, acknowledgment of order, GRN, bill
of materials, PQQ

CHAPTER 10 POLICIES AND PROCEDURES

1 RESPONSIBILITIES OF THE PROCUREMENT FUNCTION

Head of procurement, senior procurement manager, procurement manager, contracts manager,

supplier manager, expediters, procurement analyst/research manager

Identification of requirement -> sourcing plan -> market analysis -> pre-qualification of suppliers
-> evaluating supply offers + options -> creation of contract

2 REGULATIONS RELATING TO COMPETITION

Competition: different procedures in place for orders of different volume or value

Different approaches to contract award: framework agreement, RFQ

3 LEVELS OF DELEGATED AUTHORITY

Part-time purchasing before dedicated procurement function in many organisations + user

departments developed their own contacts and ways of doing things

When items are technical in nature, users do not trust procurement function to have specialist
knowledge, users may deliberately keep spending decisions away from procurement department –
known as maverick buying – decisions made unwisely, not enough attention, uncoordinated spec
+ procurements leading to inefficiencies

4 REQUISITIONS, ORDERS + INVOICES

Authorisations/sign-offs required at number of stages: requisition, before spec is released to

supplier, when PO completed, when suppliers invoice is received, contract changes
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Invoice clearance through three-way matching: invoice, PO and GRN

Purchasing policy manual, introduction + scope, definition, procurement roles responsibilities +

compliance, delegated purchasing authority (DPA)

5 CORPORATE GOVERNANCE OF PROCUREMENT

The rules, policies, processes and organisation structures by which organisations are operated,
controlled, and regulated, to ensure that they adhere to accepted ethical standards, good practices,
law and regulation

The system by which organisations are directed and controlled

Important to monitor because:

- Control large sums of organisational funds

- Opportunities to commit financial fraud/misuse systems or information for personal gain
- Decisions benefitting some suppliers over others

Governance framework: regulatory mechanisms, checks + balances, prevention + correction