BSP 282

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QUESTION ONE

a)

1. The Right Quality

When the purchasing department is looking at the procurement of materials from suppliers, they
will have been given some guidance by the manufacturing department, research, and
development, or the quality department.

This should include a variety of information about the item to be sourced, such as:

 Physical Description 
The purchasing department must know the physical attributes of the part they are
required to source.
For example, if the required material must be made of a certain shade of a blue, then the
purchasing department must be able to communicate that requirement to the potential
suppliers to ensure that the specification can be met.
 Chemical Composition 
This is very important for sourced materials that are used in the chemical process. The
quality department should give the purchasing team a detailed list of chemical
specifications of the required material. This should include a list of characteristics and
specifications that the materials should conform to, as well as the ranges that the
materials must lie within. For example, a sourced chemical may be required to have a pH
of between 5.6 and 5.9; otherwise, the material would not be suitable for the
manufacturing processes.
 Dimensional Measurements
For a part to be used in the manufacturer of a machine the part must conform to certain
dimensional specifications.
For example, if the manufacture of a finished item required the use of a Pentalobe TS1
screw with a length of 4mm, then the supplier must be able to produce the item in that
correct size.
 Performance Specifications 

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If a part is required to withstand certain forces or perform in a particular manner, the
purchasing department must find a supplier that can achieve those specifications.
For example, on a household item such as a washing machine, the rubber belt that is used
must be able to withstand certain forces and not fail within a certain number of
revolutions. This quality measurement is key for a business if they are to produce
finished goods that are reliable in the eyes of their customers. Therefore, it is important
for the purchasing department to find suppliers who can provide parts that meet quality
specifications.
 Industrial Standards
Some parts required for the production of finished goods must conform to certain
industry standards. These standards are set by a number of trade or industry groups who
try to maintain a certain level of quality. By having an item that conforms to a particular
industry standard, the customer will have a level of confidence in the product.
There are a number of industry standards that are used, such as Society of Automotive
Engineers (SAE), which is a global association of more than 128,000 engineers and
related technical experts in the aerospace, automotive and commercial-vehicle industries.
The society has hundreds of standards that relate to different technical aspects of
manufacturing.
 Brand Name
Sometimes the quality department or development team will inform the purchasing
department to only source a particular brand name. This may be due to the specific nature
of the part made by one company or the level of quality it has over competitors.

2. The Right Price


Securing all of the above at a price which is reasonable, fair, competitive and affordable. Ideally,
minimizing procurement costs in order to maximise profit, by:
 Price analysis.
 Supplier cost analysis.
 Competitive pricing and negotiation.
If the right price is not achieved:
 Suppliers will be free to charge what they like, without checking.

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 Supplier’s profit margins will be ‘squeezed’ unfairly, leading to insecurity of supply.
 Materials and supply costs will rise.
 Profits will fall or prices charged to customers will have to rise (losing sales).
 There will be less profit to motivate shareholders and re-invest in the business.
Based on this analysis, it is especially worth nothing that the ‘five rights’ formula does
not include the ‘right supplier’ although selection of the right supplier will be crucial in
achieving the other procurement objectives.
Arguably, the ‘right supplier’ is one who can deliver the right quantity and quality to the
right place, at the right time, at the right price. However, there may be other
considerations in the choice of supplier, such as the supplier’s compatibility with the
buying organization; its credibility and reliability; its potential for innovation and
development; its willingness to commit to continuous improvement and relationship
development; its ethical and environmental performance; and so on

3. The Right Quantity

Obtaining goods in sufficient quantity to meet demand and maintain service levels while
minimizing excess stock holding (which incurs costs and risks), by:

 Demand forecasting.

Demand forecasting is the process by which the future requirement of any product or
service is estimated. Providing the suppliers a heads-up on the demand forecast helps in
matching the demand and supply and also in reducing the system-wide inventory.

 Stock Control

The aim of stock control is to ensure stock levels remain accurate and there is sufficient
stock available to meet its own needs and those of consumers. Key focus should be
placed on this activity to ensure stocks are not too high, to minimise waste and to
optimise the overall cost of the holding stock. Having too high or too low a stock can be
harmful; too high a stock level represent money tied up and can impact on cash flow
whereas too low stocks could result in not being able to satisfy order demand.

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 Stock replenishment systems.

b)
The activity of acquiring goods or services to accomplish the goals of an organization.
Purchasing as a link is when it acts as an intermediary between other functions like accounts,
marketing and production.

Purchasing as a relationship is when it forms long term relationships with suppliers and
customers.

QUESTION TWO

a) Five factors to consider in Make or Buy decision

Every firm engaged in the production of one or more type of goods aims at profit maximization.
To accomplish this objective, it tries to procure the desired material for the operation of its plant
at a low cost. It has usually the alternative of satisfying its requirements by producing the goods
or material from within the firm itself.

In some cases, a firm can manufacture materials in the desired quantity at a relatively low cost;
but in certain other cases, the procurement of these goods from outsiders is more advantageous.
In determining whether goods or material should be purchased or produced within the firm arises
the “make or buy” problem.

The following are some of the factors influencing make or buy decisions.

1. Size of the company influence Make or Buy decision

The size of a concern have a greater influence on Make or Buy decision. The decisions are taken
on the basis of their financial implications for a growing concern.

For small companies, with an annual expenditure of a few lakhs of rupees, it is always desirable
to buy materials from outside.

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In big concerns, where a substantial amount is involved, a full-scale analysis is required covering
company matters relating to overall corporate policy, direct cost, personnel relations, plant
layout, and other details which are incidental to any manufacturing programme.

2. Difficulties in Manufacturing

Manufacturing may be undertaken to ensure a regular supply. This is specially necessary where a
close coordination between demand and supply is required. The decision to make goods appears
to be quite attractive from the point of view of self-sufficiency, the high cost of procurement, and
the interruptions in deliveries by vendors confronted with labor difficulties or natural calamities.
It has been said that the difficulties which manufacturers are trying to avoid to arise even when
they buy material for their own production. But the danger is less, for there is a greater assurance
of regular supply, when the item is manufactured by the user himself.

3. Quality of goods

In some cases, the decision to make flows from the company’s expectations to have goods of a
desired quality. It has been observed that, in a seller’s market, vendors do not bother about
quality and specifications. Sometimes they sell only high quality goods and enjoy a profitable
sales volume; they do not, therefore, have any interest in lower quality goods which at times may
be needed by some manufacturers. In such a situation, the producer has no option but to
manufacture the goods himself.

4. Profit factor

There are conditions under which it is profitable for a company to produce certain items more
economically than they can be bought from outside. If it discovers a new process which enables
it to produce some items at a definitely low cost or if it acquires equipment at a relatively low
price that can manufacture goods cheaply, the decision to make goods instead of buying them
will be quite profitable.

5. Capacity to manufacture

Capacity of a firm to manufacture materials also affects the make or buy decision. During the
period of depression or recession, the manufacturer with idle plant capacity may find it desirable

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to undertake the production of those goods which they were formerly buying. Even during
normal times, the decision to make is taken with a view to increasing the total volume of
production. In this way, the overhead costs can be distributed. Sometimes, protection of quality
design also tempts companies to make decisions.

b)

Types of specifications

1. Conformance

Conformance is how well realities match specifications, rules, principles and plans. An example
is design. Work that matches a design. Typically, a design conforms to requirements and work
products conform to both design and requirements.

2. Performance

The accomplishment of a given task measured against preset known standards of accuracy,
completeness, cost, and speed. For example in a contract, performance is deemed to be the
fulfillment of an obligation, in a manner that releases the performer from all liabilities under the
contract.

c)

Three reasons in favor of the purchasing function becoming involved in the drafting of a
specification.

1. It helps to minimize risks associated with the product to be designed, it help to transfer
technology knowledge upon development stages, it reduces costs associated to that
development,
2. It help to enhance the Total quality management towards world class purchasing to reducing
defects to zero defects of the product intended
3. Improves quality of product that will be accepted in the market and hence increase the sale of
the finished goods from that product and leading to an organization making more profit and

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that to say help an organization to achieve the competitive advantage in the market place.

QUESTION THREE

a)

Key TACO elements to critically analyze in the procurement of motor vehicles

Traditionally, Total Acquisition Cost of Ownership (TACO) has been a calculation intended to


help buyers and owners determine the direct and indirect costs of procuring a product. In supply
chain management, vendor managed inventory programs involve managing the process up to and
including point of use on an assembly line. In this case, the calculation includes the direct and
indirect cost of procuring a motor vehicle but extends beyond the procurement process to include
the costs incurred throughout the supply chain to assure a smooth integration into a final
assembly.

The materiality and value of each component of the TACO in Supply Chain Management will
vary significantly by item depending on specific characteristics, some of which include:

 Item value

 Minimum order quantities

 Material content

 Physical characteristics

 Method of delivery/lead time/freight and logistics

 Source of supply

 Volatility of demand

 Product life cycle/obsolescence

 Order processing costs

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 Application

 Program management costs

 Opportunity costs

Understanding these components and their respective impact on investment requirements and
investment risk is critical to understanding the TACO. These components impact the inventory
processing and holding costs such as warehousing labor, occupancy, and financing costs. For
example, high value items result in higher financing costs while smaller, lightweight items
(physical characteristics) can require little or no additional facilities or labor to handle.

These components also can impact investment risk, an often under estimated component of
TACO. Lead time, volatility of demand, and product life cycle all impact investment risk in the
form of dormant or obsolete inventory. Dormant inventory is inventory with no activity for long
periods of time and obsolete inventory is inventory that has reached the end of its product life
cycle. Detailed analytics are essential to optimize inventory with consideration for these
components.

Order processing costs may seem like an obvious component of TACO, but the materiality of its
impact on TACO can vary significant based on the previously mentioned components and even
more significantly from one organization or industry to another. For example, a capital
equipment manufacturer may not have the same systems and efficiencies in its order processing
methodologies as an electronic assembly house with systems designed to handle a higher number
of components and purchasing transactions. Supply chain management systems drive order
processing methodologies focused on timely and efficient communication with suppliers
optimizing order processing costs eliminating the burden on manufacturers. The duration of
order processing should be included in the lead time of a good and is directly correlated to the
order processing cost. Optimized systems with the right part profiles complete order processes
instantaneously.

The application for an item directly influences the total cost of ownership. Understanding the
application defines engineering, quality, and technical requirements. The best in supply chain
management companies engage in understanding applications to add expertise specific to
product classes outsourced. For example, products utilized in high temperature or corrosive

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environments may require certification of suppliers and materials combined with specialized
plating all with little or no tolerance of variance in the manufacturing processes.

Vendor managed inventory costs are the single biggest variable in understanding the total
acquisition cost of ownership in supply chain management once getting by the product
characteristics. Developing tailored programs that match customer requirements and expectations
requires attention to detail as does understanding the cost of those services. Some customers may
be facing capacity issues limiting available space resulting in offsite storage and variations in the
type of program needed to facilitate the smoothest flow of goods to assembly lines. Others may
have excess capacity and desire higher volumes of onsite inventory requiring lower
replenishment costs. Supply chain experts analyze your processes and develop a program to
optimize the total cost of ownership for your situation.

Opportunity cost is the most overlooked component of the total cost of ownership. Where do
you generate the most value? What is the lost opportunity if you are taking time away from your
core competencies? The additional work and attention to detail to accurately measure and
optimize the total cost of ownership takes focus and a partner who recognizes the process as part
of their competency so you can focus on yours.

b)

1. The public sector is more constrained by regulations compared to the private sector

This is perhaps the most obvious, although we might argue it is not actually the most significant.
In virtually every country, public procurement is defined and constrained in some sense by
legislation. That may be at local, regional, national or international level, or some combination of
those. In Zambia, we are bound by the Zambian regulations.

Even beyond that, wider regulations such as the World Trade Organization can come into play as
well. Clearly, this restricts how procurement is executed to a considerable degree. The private
sector is still constrained to some extent – for example, laws on equality or bribery might come
into play in procurement activities but generally, there is much more freedom from legislation.

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2. The public sector has more complex motivations and objectives compared to the private
sector

The public sector now expects procurement to address several issues beyond simple value for
money or basic supply. For example, “social value” is now enshrined in legislation in Zambia,
and there are policy goals such as supporting smaller firms, or minority owned firms, driving
employment or education, supporting equalities … the list seems almost endless today. Now
while some private sector firms might decide to look at similar areas (particularly if the firm
wants to win government contracts itself), it is unusual to find the same focus on these wider
issues in a private sector organization.

3. The public-sector stakeholder base is wider and includes those outside the buying
organization compared to the private sector

If we consider the largest and most significant public sector expenditure areas, many are of great
interest, significance and importance to those beyond the organization doing the buying itself.
So, whether that is construction of new railway lines, buying expensive drugs or hospital
equipment, providing social care, waste disposal or employment services, many citizens outside
the public body itself have a great interest in what is being bought and the supplier performance.
Even in an area like defense, where the citizen is less involved, the stakeholder picture for major
defense equipment is incredibly complex, ranging through many technical experts, foreign allies,
defense analysts and politicians. Now there are complex spend categories in many private sector
firms, but few that have 10 million stakeholders.

4. The public sector faces more transparency compared to the private sector

We suspect there are just as many major IT project disasters or other failures in the private sector
as the public, but we just don’t tend to hear about them. The public sector faces both legislation
that promotes transparency, and the general desire of the public and media to understand how
“their” money is being spent. The same simply does not apply to procurement activities in
Unilever, Shell or Ford.

So, our hypothesis is that all the practical and operational differences we observe between the
two sectors flow from these four fundamentals. For instance, if someone argues that the biggest

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difference is “you can’t negotiate in the public sector” (not really true, we should stress), you can
trace any difference back to that legislative issue, plus a touch of the “transparency” point.

In our next two articles, we will go into how these fundamentals manifest themselves in more
day-to-day terms, and just for fun, we will position those pieces as why the public sector is better
than the private and vice versa of course.

QUESTION FOUR

a)

The Importance of adhering to formal Procedures and systems

As your organization’s leaders create and enforce policies, it’s important to make sure your staff
understands why following policies and procedures is critical.

Here are just a few of the positive outcomes of following policies and procedures:

Consistent processes and structures

Policies and procedures keep operations from devolving into complete chaos.

When everyone is following policies and procedures, your organization can run smoothly.
Management structures and teams operate as they’re meant to. And mistakes and hiccups in
processes can be quickly identified and addressed.

When your staff is following policies and procedures, your organization will use time and
resources more efficiently. You’ll be able to grow and achieve your goals as an organization.

Consistency in practices is also right for employees individually. They know what they’re
responsible for, what’s expected of them, and what they can expect from their supervisors and
co-workers. This frees them up to do their jobs with confidence and excellence.

Better quality service

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When employees follow procedures, they perform tasks correctly and provide consistent
customer service. This enhances the quality of your organization’s products and services. And, in
turn, improves your company’s reputation. Employees can know they are fulfilling their roles
and take pride in their work.

A safer workplace

When your staff is following policies and procedures, workplace accidents and incidents are less
likely to occur.

This reduces liability risks for your organization and limits interruptions in operations. Your
employees can feel safe and comfortable in the workplace, knowing that their managers and co-
workers are looking out for their best interest. They can rest assured that they’ll be taken care of
if something does happen.

b)

Steps in the procure procurement process:

Step 1: Conduct an internal needs analysis

To begin, you’ll need to benchmark current performance and then identify needs and targets
before developing a procurement strategy. This involves the collection of several different types
of data. The purpose for collecting initial data is to benchmark current performance, resources
used, costs for all the departments/functions in the organization, and current growth projections.

Step 2: Conduct an assessment of the supplier’s market

In this step, the strategic procurement team identifies potential countries that are feasible sources
of the required raw materials, components, finished goods or services. If there are specific
requirements, it may limit the number of countries that are suitable. For instance, if one of the
raw materials used by the organization can only be found in one country, then options are much
narrower. For manufactured products, there will be a much wider range of potential countries
from which to select. Services may be limited by the technological requirements of the
organization.

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Step 3: Collect supplier information

A supplier’s inability to meet selection criteria can result in significant losses for the
organization. The business reputation and performance of the supplier must be evaluated, and
financial statements, credit reports, and references must be checked carefully. If possible, the
organization should arrange to inspect the supplier’s site and talk to other customers about their
experiences with the supplier. The use of agents, who are familiar with the markets and
stakeholders, can also be beneficial to this process. Organizations may select more than one
supplier to avoid potential supply disruptions as well as create a competitive environment. This
strategy is also effective for large multinational organizations and allows for centralized control,
but more regional delivery.

Step 4: Develop a sourcing/outsourcing strategy

Based on the information gathered in the first three steps, an organization can develop a
sourcing/outsourcing strategy. The following are examples of sourcing strategies: Direct
purchase: Sending a Request for Proposal (RFP) or a Request for Quote (RFQ) to select
suppliers. Acquisition: Purchasing from a desirable supplier. Strategic partnership: Entering into
an agreement with a selected supplier. Determining the right strategy for you will depend on the
competitiveness of the supplier marketplace and the sourcing/outsourcing organization’s risk
tolerance, overall business strategy and motivation for outsourcing.

Step 5: Implement the sourcing strategy

Sourcing strategies that involve acquisition or strategic partnerships are major undertakings. In
these cases, suppliers are likely to have the following characteristics: Involvement in activities
core to the buyer, e.g. supply limited raw material for core product, access to highly confidential
proprietary knowledge One of a limited number of available suppliers with specific equipment/
technology and skilled labor pool Part of the broader business strategy For a direct purchase,
organizations may begin with an Expression of Interest (EOI), prepare an RFP or RFQ, and
solicit bids from identified potential suppliers as part of a competitive bidding process. The RFP
should include: detailed material product or service specifications delivery and service
requirements evaluation criteria pricing structure; and financial terms.

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Step 6: Negotiate with suppliers and select the winning bid

The strategic procurement team must evaluate responses from suppliers and apply its evaluation
criteria. Bidding suppliers might request additional information in order to make the most
realistic bid, and the organization should supply this information to all bidders and enable them
to respond to the new information before making a final decision. The strategic procurement
team will then evaluate the received proposals, quotes, or bids, and use the selection criteria and
a process to either shortlist bidders to provide more detailed proposals (if reviewing EOIs) or
select a first and second successful bidder (if reviewing RFPs or RFQs). After the evaluation
process is complete, the strategic procurement team will enter contract negotiations with the first
selected bidder.

Step 7: Implement a transition plan or contractual supply chain improvements

Winning suppliers should be invited to participate in implementing improvements. A


communication plan must be developed and a system for measuring and evaluating performance
will need to be devised using measurable Key Performance Indicators (KPIs). This is especially
true in the early stages of using a new supplier. Transition plans are especially important when
switching suppliers. Contractual Supply Chain Improvements When bringing on new suppliers,
it is necessary to transfer information and establish linkages to logistics and communication
systems, provide training and even specific physical assets, if required. The implementation of
these transfers takes time and expertise to set and start up. Expectations during this time frame
should be agreed upon during contract negotiations with time frames for full operations and
deliveries. Transition Plans, the transition from in-house provision of services to an outsourced
service provider can be one of the riskier aspects of global outsourcing of services. How the
transition to the outsourced service is handled and how it is perceived by staff and the public are
very important. Transparency and preparation are key to this aspect of the sourcing strategy.
These simple steps will help you and your team develop and implement a strategic procurement
plan.

QUESTION FIVE

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a)

Purchasing activities can be centralized when there is need for:

 Determination of major purchasing strategies and policies


 Preparation of standard specification for the whole undertaking
 Negotiation of bulk contracts for homogenous items used by a number of plants
 Purchase of stationary and office equipment and computerized system
 Purchasing research into new market conditions, suppliers, etc.
 Rationalization of shares to be received by suppliers
 Staff training and development

Purchasing activities can be decentralized when there is need for:

 Purchasing decisions to be made as close as possible to the problem to be solved


 General trends towards independent profit centers with decentralized responsibility
 Normally decentralization facilitates closer relationship with suppliers
 The trend away from functional specification towards integration problem solving
 Benchmarking with other locations
 Support of local suppliers with lower transport cost

b)

What's the difference between an RFI, an RFP, and an RFQ?

Request for Information Request for Quote (RFQ) Request for Proposal (RFP)
(RFI)
RFI is really a preliminary RFQ is used for a b2b software RFP is a document that asks
document used by companies project, the company knows vendors to propose solutions to
that don’t understand the enough about its current a customer’s problems or
marketplace they’re about to system and exactly how it business requirements

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enter wants to change or improve it
in the future
RFI is also used when you RFQ is commonly used when RFP is used when you know
think you know what you want you know what you want but you have a problem but don’t
but need more information need information on how know how you want to solve
from the vendors. It will vendors would meet your it. This is the most formal of
typically be followed by an requirements and/or how much the “Request for” processes
RFQ or RFP. it will cost.    and has strict procurement
rules for content, timeline and
vendor responses

References

 Turner C. 2000. The information e-conomy – business strategies for competing in the
global age. First published. Kogan Page Limited: London and Milford

 Wheelen TL, Hunger JD. 2000. Strategic Management and Business Policy – Entering
21st Century Global Society. Seventh Edition. Prentice-Hall: New Jersey

 Wheelen TL, Hunger JD. 2006. Strategic Management and Business Policy. Tenth
Edition. Prentice-Hall: New Jersey

 Whittington R, et al. 2005. Exploring Corporate Strategy – Text and Cases, Seventh
Edition, Financial Times and Prentice-Hall: London

 Whorttington I, et al. 2005. Economics for Business – Blending Theory and Practice. 2nd
Edition. Prentice-Hall and Financial Times: London

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