Module:

L4M2
Title: Defining Business Need
Session Notes: Theory - Chapter 1


LO1.1 – Analyse how business needs influence procurement decisions

Key themes:
When purchasing any good or service it can fall into one of the following:
- Straight re-buy: items already sourced from a supplier, there may
be an agreed price or an established preferred supplier in place.
Minimal effort is required.

- Modified re-buy: some elements of the specification have changed;
renegotiation may be required to cover the changes in specification.

- New buys: Procurement of an item which has never been sourced
before.

RAQSCI defines the order of precedence for requirements:
- Regulatory; legal, legislative and regulatory body requirements.
Availability; supply market factors. Can goods or services being
sought be purchased on the open market?
- Quality; are the goods or services able to be consistently produced to
the quality required.
- Service Requirements; are the goods or services provided with the supplementary services expected?
- Cost; if the above considerations can be achieved then cost should be considered. Can the above be achieved at a
lower cost?
- Innovation; is there a more innovative good or service available, is there a particular area of innovation you wish
your suppliers to develop?

Problem Solution
Problem definition can be defined as:
Closed problem; something has happened that should not have
happened. Problem Definition Test

Open-ended problem; these are where something is stopping the
achievement of an objective or blocking the organisations performance or Data Collection Hypotheses
ability to achieve it’s goals.

When problem solving, we need to consider the “5 whys” and not simply Analysis Insight
jump to the first obvious solution. It may be the best solution, but you will
not know for certain until you check.

The reason we are talking about problem solving here is when we prepare a business case, a business case is normally
an opportunity to pursue an opportunity or a defined problem. A template for a business case can use this structure:
- Executive Summary - Long term strategy considerations
- Business requirements - Price and cost analysis
- Market analysis - Supply analysis
- Technical developments - Vulnerability analysis
- Sourcing objectives - Implementation plan
- Competitive advantage

Revision points
1. Make a list of five things that you buy in your current role and for each item state which type of purchase it is
(straight re-buy, modified re-buy or a new purchase), and a short justification why it is that type of purchase.
2. For each of these five items consider RAQSCI. Which is the most important RAQSCI factor of each?
3. Consider the last problem you had to solve, work or personal life. Retrospectively conduct a problem-solving
analysis to determine if you chose the right solution.




LO1.2 – Identify how costs and prices can be estimated for procurement activities

Key themes:
When conducting the business case, a key element is understanding the procurement costs involved, but also what
options are available on the supply market. To understand this, buyers can undertake research, there are two types
of market data that can be used:
- Field research (primary) is the collection of data directly by an organisation for the sole purpose for which it is
required.
- Desk research (secondary)is data available from a variety of sources but which
has been gathered or collected for other purposes.

Different types of costs to be taken into account and some of these will be
easier than others to identify:
- A direct cost to an organisation are directly linked with a specific unit of output. So,
the cost is linked to the sale of the product or provision of the service.
- An indirect cost is not demonstrably linked to the sale of a product or provision of a
service but is a cost the organisation still believes it must incur. These are often
overheads such as electricity or rent costs.
- Semi-variable costs; costs that can show characteristics of both fixed and variable
costs.

The Break-even point is the point at which revenues match costs exactly.
Neither a profit nor a loss is made.

Using the Wash ‘n’ Go example given on page 29 of the coursebook:
Fixed costs (P.A) : $34,000
Variable costs : $3.50
Price : $10

Price less variable costs is marginal profit of $6.50.

Fixed cost is £34,000. Divided by $6.50, the marginal cost for each unit.

This means that Wash n Go would need to conduct 5,231 washes per year to breakeven (covering their fixed cost).

After covering their fixed costs any washes that it undertakes above this number would then start to return a profit of
$6.50 for each wash.

Purchase Cost analysis; this is the process of looking at the cost of goods or services
being purchased to understand the cost build-up with the aim of reducing cost of the
goods or services being purchased.

When conducting purchase cost analysis buyers should segment their suppliers and pick
only the most critical ones to undertake these tasks with. The supplier segmentation
model from Peter Kraljic is shown in it’s original form.

Total Cost of Ownership or Whole Life-cycle Costing.
Why understanding the total cost of ownership or whole life cost is so important to
making the right decision. You should not purchase based on first off cost alone, this will
not bring true value. Consider our battery example there are lots of hidden costs that need to be considered.


Revision points
1. Why research is important to help determine a valid cost or business case opportunity
2. Understand the different types of costs and why these are important in estimating/validating a suppliers cost or
setting a target cost.
3. Why total cost of ownership or lifecycle costing is important when evaluating different business case options.






LO1.3 – Analyse the criteria that can be applied in the creation of a business case

Key themes:
When a business case is prepared, it is then presented to senior managers or decision makers to determine if it
should proceed or not. Senior managers will then determine if the business case should proceed against a number of
criteria, these criteria can often be determined in advance.
- Objectives, what is the objective/problem that the business case is seeking
to solve.
- Options, A good business case should not propose one option without
having given consideration to other options. If it does not consider a range of
options it cannot be seen to be objectively selecting the best option.
- Costs and benefits, this is the most well know approach to evaluation. It
compares the cost to undertake a business case with the benefit that may
come from its successful completion/delivery/implementation.
- Risk Assessment, within any robust business case you must assess the risks involved in that particular challenge
or opportunity.

Considering how important it is to objectively rate a business case.

Benchmarking is measuring your performance against that of others. Benchmarking can be conducted as follows:
- Internal, where a business process is compared to a similar process in the same organisation.
- Competitor, where a product, service or process is benchmarked against that of a direct competitor.
- Function, where similar or identical practices are compared to those of an organisation outside the immediate
industry sector.
- Generic is looking at the best processes or functions regardless of what industry they are within.

Revision points
1. Think of the last business case you were involved in, or a business case a colleague has conducted. What criteria
was it assessed against and why?
2. Provide a different example of each type of benchmarking to those listed above and describe why benchmarking
would be beneficial in each instance.



LO1.4 – Interpret financial budgets for the control of purchases

Key themes:
Oxford English Dictionary states that budget is “an estimate of income and expenditure for a set period of time”.
This budget consists of three main activities:
- Planning; identifying how and when money will be spent
- Controlling; controlling the budget to ensure it is spent in line
with expectation and not overspent.
- Decision-making; in the event of over or under spending taking
decisions to bring this back in line with expectations.

Performance of the organisation relates directly to the control of budget.
How the organisation and/or a project performs against the budget is
vitally importantly.

Corrective actions are required if the performance deviates from the
budget.


Revision points
1. Ensure you understand the importance of budgets, and control of spend against budgets within organisations or
projects (once business cases have been implemented as projects).
2. Be able to explain the impact of budgets on procurement and procurement activities.






Guided Self Study

Ahead of the next session you should focus your learning on the following areas:
1. Review the session notes provided, add to your notes following this session.
2. Review the “remember” boxes to ensure you are comfortable with all these key points.
3. Watch the tutorial on how the objective response exam work so you are familiar with the exam format.
4. Ensure you can apply examples to straight re-buy, modified re-buy and new buy.
5. Consider elements of cost that would be considered in a total cost of ownership model, and if you can apply this to
any items that you purchase.


Exams and practice questions

This module (and L4M7) is an Objective Response Exam.

Objective Response (OR)
These questions allow you to select a response from a list of possible answers. You will find these types of exams across
all our qualifications levels and they are marked by computer and then moderated by CIPS examiners.

The following link explains the electronic exams process:
https://www.cips.org/learn/qualifications/diploma-in-procurement-and-supply/


Practice Questions
The new syllabus was launched in July 2019, CIPS will not release past paper questions as they reuse questions from a
single bank of questions for each exam.

We will provide you with practice questions separately as we progress through the sessions.

CIPS provide practice questions here:
https://www.cips.org/Documents/Sample%20questions%20August%202020/CIPS%20L4M2%20V4.2.pdf