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PURCHASING CONTEXTS: COURSE BOOK BONUS PACK Welcome to the ‘bonus’ features of your Study Pack! This material is intended to support, extend and focus your study and revision for your Purchasing Contexts exam. CONTENTS Latest material added: Course Book Upgrade February 2011 Use the News February 2010 Mark Maximisers February 2010 Can You Test Me On This? February 2010

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COURSE BOOK UPGRADE The business environment is subject to constant, rapid change. And that means not only emerging developments in purchasing and supply – but new examinable topics, issues and case studies. Even the best Course Book material can look dated within months of publication. But this Upgrade tool gives us the opportunity to enlarge and enhance our syllabus coverage on a regular basis: keeping you constantly up to date and in the loop. • Amendments and errata are where we put right our occasional bloopers.

• Updates are for examinable events (such as new legislation) that occur during the shelf life of the printed Course Book.

• Additions are topics that came up in the latest exams but aren’t covered in the current edition of the Course Book.

• Integrated learning is where we give handy ‘checklists’ for topics (usually in the ‘How to…’ style) which draw on material across the syllabus.

Please contact us if you spot any errors, or facts that are past their use-by date, in your Study Pack. We’ll gratefully ‘patch’ the problem here – and incorporate the amendments in the next editions of the Quick Start Guides, Course Books and Passnotes. AMENDMENTS & ERRATA Chapter 1, paragraph 5.18. As an example of Equal Opportunities legislation, we refer to the Race Relations (Amendment Act) 2000. Of course, this only applies to racial discrimination: you should be aware that equal opportunities law exists in relation to discrimination on the basis of sex, disability, religion/belief, sexual orientation and age. The most recent legal measures on these issues include the Employment Equality (Sex Discrimination) Regulations 2006 (which, among other things, outlaws sexual harassment) and the Employment Equality (Age) Regulations 2006 (which outlaws age discrimination for the first time). Chapter 1, paragraph 2.25. The Defence Procurement Agency was merged (in April 2007) with the Defence Logistics Organisation to form a new procurement division called Defence Equipment and Support.

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UPDATES

Incoterms 2010 Some significant changes have been introduced by the latest edition of incoterms: Incoterms 2010. For a transitional period many buyers and sellers are likely to continue using the earlier edition, so you should still study the previous rules carefully (Chapter 12 of your Course Book). But be aware also of the following changes introduced in the latest edition.

• The terms DAF (delivered at frontier), DES (delivered ex-ship), DEQ (delivered ex-quay) and DDU (delivered duty unpaid) have been abolished

• New terms DAT (delivered at terminal) and DAP (delivered at place) have been introduced. Buyers who used to adopt DDU should now adopt DAP, which means delivered (not unloaded) at the named destination, not cleared for import. DAT, as the name suggests, is ideal for delivery to a container terminal.

• Some of the terms have been amended to clarify the allocation of terminal handling charges at the point of arrival.

• Incoterms now clarify the allocation of risk and responsibility in relation to security of the goods.

• The terms are now arranged in two categories (rather than the previous four). These are ‘rules for any mode of transport’ (ie EXW, FCA, CPT, CIP, DAT, DAP, DDP) and ‘rules for sea and inland waterway transport only’ (ie FAS, FOB, CFR, CIF).

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ADDITIONS Add to Chapter 2, after paragraph 3.21 3.22 The purpose and role of the Competition Commission may be summarised as

follows: Table 2.3.

Table 2.3: Purpose and role of the Competition Commission

Purpose Role To increase the level of competition in the UK economy

Monitoring competitiveness of markets within the UK economy, on referral from the OFT

To contribute to the UK’s economic performance and productivity within the international economy

Conducting enquiries into acquisitions, mergers, markets and regulation of major industries

To benefit consumers through lower prices, wider choice, innovation and quality

Imposing penalties and/or a moratorium on the progress of a merger, where activities are construed as detrimental to competition.

Add to Chapter 8, after paragraph 4.33 4.34 Some of the difficulties which may be encountered when implementing

benchmarking in practice include:

• Lack of suitable internal or external ‘targets’ or partners for benchmarking

• Lack of clarity about which activities or result areas should be benchmarked

• Difficulties in accessing competitor information for competitive benchmarking (and/or ethical issues in gathering such information)

• Differences in the contexts and challenges of different firms/functions, making it difficult to compare performance as like with like, or to transfer learning and methods from one firm/function to another

• Resource constraints, including time, finance and suitably trained personnel

• Resistance to the benchmarking process and/or performance measurement, due to fear of judgement or change

• Resistance to the implementation of changes and improvements.

Add to Chapter 11, after paragraph 2.17 2.18 The main advantage of using the payback period method of capital appraisal is its

relative simplicity. It also allows the appraiser to apply different scenarios based on cash-flow, interest rates, inflation (and so on), to consider best and worst cases.

The main disadvantage of using the payback period method is that it does not take into account cashflows beyond the initial recovery period: it therefore fails to measure the profitability (and hence long-term business case) of the investment, and may encourage short-term thinking.

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Add to Chapter 12, as extra bullet points in paragraph 3.3

• The effect of protectionism on domestic consumers may be: increased prices, restricted availability, lack of choice and poorer quality.

• The effect of protectionism on domestic manufacturers (despite the short-term benefits of protection from overseas competition) may be long-term difficulty in exporting goods (and hence growing turnover and market share), as they have not had to become competitive with overseas manufacturers.

INTEGRATED LEARNING PURCHASE CRITERIA: MRO (Chapter 9) vs CAPITAL EQUIPMENT (Chapter 11) MRO items Capital equipment

Availability Cost Ability to use standard/generic

substitutes Ability to minimise stock holding Supplier service levels

Total costs over life of asset Asset utilisation: lifespan, flexibility Space/access requirements Training, health and safety requirements Cost/availability of spare parts through

the life of the equipment Post-contract maintenance service Options (buy, lease or hire)

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USE THE NEWS Here we pick up on some of the Hot Topics covered in the ‘In the News’ feature. We consider how they might come up in exam questions – and how you can use the examples and illustrations in your answers. Chapter 1: Corporate social responsibility A question on stakeholder groups, and how their (potentially conflicting) demands could be satisfied, came up in the November 2007 exam. Beyond commercial relationships (ie customers, suppliers and regulatory bodies as stakeholders), such a question highlights the concept of ‘wider’ or ‘secondary’ stakeholder groups already familiar to the public sector – and now gaining ground in the private sector due to increasing public demand for CSR, ethical and sustainable trading (and procurement). The November 2008 exam included a question on how CSR policy could serve the interests of a case study organisation. And a question in the November 2009 exam highlighted the fact that both public and private sector organisations have pressures for CSR. This is a hot topic! Corporate social responsibility and ethics in purchasing is a key issue: see In the News for some of the most hotly talked-about examples – and add ‘sustainable procurement’ or ‘sustainable supply chain management (SSCM)’ to your vocabulary. Our In the News feature on SSCM discusses both public sector targets and private sector issues in this area. Chapter 5: Consortium buying In Section 5, we discuss the practice of collaborative or consortium buying, and briefly survey its costs and benefits. Collaboration with other business units, or organisations (even industry competitors) is clearly one option for a small buyer seeking to enhance its bargaining power and economies of scale: it may be an option pursued, or considered, by a case study organisation (buyer or supplier). Our In the News feature summarises some of the arguments for and against, both in the private and public sector. Note that the pressures are subtly different – and remember to contextualise any comments to the scenario organisation…

Note also the increased emphasis on the potential of collaborative buying arising from the Global Financial Crisis. Chapter 10: Outsourcing Outsourcing was the topic of a question in the Exemplar Exam, probably written when the object lesson of British Airways and Gateway Gourmet was on everyone’s mind! Make sure that you can draw on this example, which perfectly illustrates the point made in Section 3, about the drawbacks of outsourcing… In the exam, you might be asked about the benefits of outsourcing, or the drawbacks. If a question asks you to ‘evaluate’ or ‘discuss’ outsourcing (or, as in the November 2009 exam, to ‘contrast the merits of outsourcing and in-sourcing’) you need to present both viewpoints – in which case the BA example will be a useful balance to

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examples of successful outsourcing. The BA story could also be used specifically to illustrate the need for:

Multi-sourcing, rather than putting all strategic eggs in one basket! Careful supplier appraisal, including criteria related to human resource

management and ethical standards Ongoing monitoring of outsourced activities and standards, and management

of the relationship with the service provider. If you get a case study based on the incident, you might bear the following comments in mind. The dispute between BA and Gate Gourmet should act as a warning to the profession, purchasing experts have claimed. They say the high-profile case illustrates why purchasing staff drawing up contracts for outsourced work must carry out risk assessment, monitor supplier performance and implement contingency plans in case contractual terms are not met. Kevin Barrow, outsourcing and staffing partner at law firm Tarlo Lyons, said: “Procurement loves consolidation, but there is a downside if you have all your eggs in one basket. Perhaps what BA needs is a lot of suppliers and a bigger procurement department so it’s not totally exposed if one has a problem.” And while Martyn Hart, chairman of the National Outsourcing Association, does not believe outsourcing is the root cause of this particular row, he said any core service that is outsourced must be supported by a back-up plan…. ‘Step-in’ clauses, which allow firms with outsourced contracts to reassume responsibility for the work if something goes wrong, were becoming increasingly popular. Rebecca Ellinor, Supply Management, 25 August 2005 As a counter-example of successful outsourcing and its benefits, an article entitled ‘It’s good to outsource’ (Supply Management, 4 August 2005), described the BT group’s 20-year record of successful sourcing from low-cost countries on a large scale: a strategy of ‘ensuring value for money and getting the rights skills and the right economies’. The article describes BT’s approach to:

Corporate social responsibility and ethical sourcing from low-cost economies Risk management: physical audits of suppliers and their supply chains, to

ensure that environmental, human and financial aspects conform to BT’s standards

Managing cultural differences: cultural sensitivity training for BT managers for example. (‘Purchasers risk failure if they do not understand both the culture and the expectations they are buying into. In India, people don’t like to say ‘no’: ‘This can leave a company unaware of problems at, for example, an outsourced call centre.’)

Planning the physical logistics of the supply chain and undertaking thorough cost-benefit analysis.

In addition, there has been much debate in the professional media about the benefits and costs of procurement outsourcing: that is, the transfer of some, or all, of an organisation’s procurement activity to a third party.

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For example, RoadChef Motorway Services has 20 sites and multiple franchised brands (such as Wimpy, Pizza Hut Express and Premier Travel Inn). Because of its multi-faceted requirements, it has outsourced both direct and indirect (telecom, utilities and washroom services) procurement to third-party service provider ‘buying Team’, which also manages the supply chain routes into each site and franchised brand. “The decision to outsource … was initially based on the realisation that a shortage of internal category knowledge and experience prevented RoadChef from fully realising its purchasing potential… RoadChef says the service is flexible and delivers significant cash savings while maintaining the highest standards of the end product. It also continually meets KPIs set by the board. In addition, the outsourcing arrangement delivers non-cash benefits through best-practice procurement processes set as standard at head office and site level. These include proven product recall systems, supplier disaster recovery plans and a central product and supplier database which incorporates all product information and a supplier confirmation process for product changes.’ Anna Cooper, ‘To outsource or not to outsource?’, Supply Management, 10 May 2007 A practical guide to procurement outsourcing (if you want to follow this up) is given in the article ‘12 steps to outsourcing’, by Guy Strafford, Supply Management, 15 November 2007. Chapter 8: e-sourcing and e-procurement Although no marks have been directly available for IT-related questions so far, it’s still a major issue which should underpin all your thinking on tendering, ordering and contracting procedures. Could it be done more efficiently electronically or online (eg as an answer to May 2007 and May 2008 questions on improving the efficiency of low-value item buying)? What controls might be necessary? How would it work? What examples are there? An exam question might also be set on the uses of e-procurement, through the stages of the purchasing cycle (Chapter 7). The ePS system (described in the ‘In the News’ article) is an example of what is possible.

Suppliers need enter their product information only once, which can be overlaid with pricing and contract information. The product or service information is then made available to all buyers on the ePS system.

Buyers can access the entire catalogue, but they can also limit their choice to

selected ranges. They can also see prices relevant to their organisation, and the contracts that they have negotiated.

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You might also use this example, if called on to discuss the drive for purchasing efficiency in public sector organisations (Chapter 1), or to support your thinking in a case study involving a public sector organisation. A wide range of public sector organisations now use the ePS platform, including local councils, the Education Inspectorate and the Public Pensions Agency. Chapter 8: Purchasing for projects In Section 3, we discuss the special challenges of purchasing for major projects. Projects don’t get much more ‘major’ than developing infrastructure and superstructure for an Olympic Games, and the London 2012 Olympics may be a good place to start if you are called on to discuss the complexity of major projects. Our In the News feature on the London 2012 Olympics makes some introductory points, but we will be monitoring progress in the press and purchasing journals to provide you with up-to-date facts and commentary. Chapter 12: International purchasing In Section 3, we discuss tariff and non-tariff barriers to trade, including import quotas. The problems posed by quota agreements are highlighted by the 2005 example of European import limits for hundreds of types of clothing sourced from China: this would make a useful illustration for an answer on the challenges of international trade, global supply base decisions, environmental factors impacting on business – or, as in the May 2009 exam, the nature of tariff and non-tariff barriers to trade. The Global Financial Crisis So far, the exams have not explicitly addressed the pressures placed on purchasers by the Global Financial Crisis, and in most cases, the case studies assume a relatively strong and steady market.

However, future case studies could well feature companies struggling to enhance liquidity or profitability in poor trading conditions, dealing with suppliers in financial difficulty, seeking to preserve their competitive advantage through added value improvements, or emphasising cost savings through procurement. There is certainly potential for exam questions to be set on topics such as: • The challenges and opportunities facing supply chains in a time of ‘global

financial crisis’ and recovery (highly relevant at the present time)

• The role of purchasing in helping an organisation and its suppliers to cope with change in the face of crisis (eg through solid supply chain relationships)

• How purchasing can balance the competing priorities of the five rights in a time of recession, when the emphasis may shift to ‘right price’

• The role of purchasing in cost reduction, the maintenance of profitability, and business recovery

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• How an organisation can balance its wider CSR objectives (including social and environmental sustainability, which come at a short-term cost) with the immediate interests of economic survival and profitability.

You should think through each area of the syllabus in the light of pressures (discussed in our ‘In the News’ feature) for cost reduction, restructuring/downsizing, the need to find market leverage through core organisational competencies (such as supplier management) and so on. Here are some of the possible issues.

The need to develop alternative approaches to motivating suppliers and maintaining supplier loyalty, given pressure on financial resources [Chapters 5, 7]

The need to develop key organisational skills and relationships for survival and recovery eg via strong supply chain relationships, negotiating skills, commitment to collaborative cost-reduction and improvement, strong customer relationship management and customer service (for competitive advantage) and so on [Various chapters]

The need to balance wider stakeholder needs (including CSR or social and environmental sustainability, which come at a short-term cost) with the immediate interests of primary stakeholders (shareholders) and the need for economic survival. [Chapter 2]

Potential for procurement professionals to raise their influence and status within the organisation, as a result of business partnering, higher profile and bottom-line contribution (particularly in delivering cost savings). [Chapters 4, 9]

You might like to pay close attention to the ‘tactical responses’ to the GFC suggested for purchasers in our In the News feature: some of these are well within the scope of this syllabus, and may be useful in the exam, if you get a case study scenario set during a recession…

There is a particularly interesting issue for organisations concerned with Corporate Social Responsibility (discussed in Chapter 1, Section 5), as social and environmental sustainability objectives are often ‘the first to go’ when economic sustainability (or profitability) becomes a priority in times of economic hardship.

A survey for Supply Management (27 August 2009) found that 64% of purchasers are not getting ‘significant’ financial benefit from sustainable procurement. ‘There may be opportunities to benefit from implementing facets of CSR, but at the present time this is quite low on the agenda.’

• Recessionary pressures may reduce demand for sustainable products, services and commodities. Towards the end of 2008, for example, Far Eastern buyers of UK waste paper for recycling had all but disappeared from the market, and local authorities, supermarkets and printers, among other organisations previously earning revenue from the sale of their waste paper, have been forced to resort to incineration or landfill.

• Budgetary and funding restrictions (and/or cost reduction targets) may make extra expenditure on sustainability impossible – or difficult to justify. This may be a particular problem for third sector organisations, with limited funding from grants and donations. However, it is also a pressure on public sector organisations, with the need to demonstrate value for money and ‘economic advantage’ in contract award. Meanwhile, in the private sector, the 2008-9

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economic recession has similarly imposed severe investment constraints and budget cuts, with the result that sustainability is perceived as a low priority by many purchasers.

In short, the focus is on economic survival – and although this can be seen as a legitimate sustainability issue in its own right, it may create a barrier to other social and environmental sustainability measures.

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MARK MAXIMISERS Here we throw in a variety of quick tools to focus your revision and beef up your exam answers, including: key definitions and quotes, memory-boosters and case-study examples and illustrations. Of course, there are similar features in the Course Books and Passnotes. Think of these Bonus Pack ones as a double bonus: they give you some extra options – and they help keep the Course Books short! EXAMPLES & ILLUSTRATIONS Chapter 1: Public Sector Organisations We have already had several public-sector case studies (in the Exemplar and November 2007 exams), and case studies featuring public sector customers (in November 2008) and there is no reason why this shouldn’t come round again! Now that we have non-scenario essay questions in Part B of the exam, there is even more scope for ‘compare/contrast public and private sector organisations/approaches’ questions (as in the November 2009 exam). A recent article in the online bulletin for members of the Chartered Institute of Marketing (What’s New in Marketing) helpfully addresses a range of issues in managing public sector stakeholders. Among other points, the article argues that: ‘In many countries, central and local governments and other public bodies are focusing on open government, improving citizen access and enhancing the quality of the services provided, while retaining the strong traditional focus of government on cost-effectiveness. These new foci manifest themselves in various initiatives from central and local government and other public agencies. They include:

- Provision of electronic access - Improvement in citizen service provision and management - Ensuring that social exclusion does not occur when new initiatives are

implemented, and that those in need of help or service actually receive it, rather than those who take most quickly to new channels of access.

The challenges this new direction poses to governments are:

- Engaging the external environment after years of inward focus - Determining what the current situation actually is, before formulating

new initiatives - Establishing the current level of citizen service provision, including the

development of acceptable measures and measuring tools - Identifying where the gaps exist in the service provision - Directing resources in the most cost effective/prioritised way to improve

the service.

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Meeting these challenges is made more complex by a number of other factors, including:

- Increasing customer expectations, caused by the performance (and perhaps sometimes only the promise) of the private sector

- The rising numbers of lobby groups and other pressure groups - Increased confidence of customers in using the media to put pressure on

government for better treatment - The need to use new channels of communication and distribution to

reach customers who have had problems accessing government services through traditional channels, while ensuring that these new channels can work in an integrated manner with older channels

- The need to observe the government’s sometimes very tough general requirements affecting how customers are managed in either sector (eg data protection law)

- The need to manage new relationships with the private sector service providers who are involved in some way in this change, usually as agents.

Chapter 1: Defence and health services procurement In Section 2, we discuss the challenges of defence procurement. This has been highlighted not just in the UK but in other nations. The Australian National Audit Office, for example, announced in June 2007 that Australia’s top $30 billion in war-fighting procurement projects would be subject to an annual review. ‘ANAO officials told a Senate inquiry that the same types of contract and project management errors kept repeating across a range of projects... The ANAO singled out Defence’s failure to keep up-to-date copies of multibillion-dollar contracts (to keep track of what it paid for), failure to factor in foreign exchange fluctuations, unrealistic delivery deadlines, persistent schedule slippages and failure to correctly account for the GST [Goods & Services Tax, similar to UK VAT]… The Defence Materiel Organisation manages more than 200 military projects at any one time as part of a $60 billion, 10-year military hardware purchasing plan. DMO… has embarked on an aggressive program to improve project management and business acumen among the organisation’s 6000-plus staff…. The Australian Strategic Policy Institute said the ANAO move would greatly improve the “transparency of defence contracting. Taxpayers deserve to know what they are getting for their money”.’ The Australian Financial Review, 5 June 2007 Meanwhile, there are many success stories in health services procurement, as discussed in Section 2, through dedicated purchasing bodies and consortia. • NHS Supply Chain announced a £6.3 million saving, made within the first five

months of its procurement contract with the NHS. It was achieved on behalf of more than 200 NHS hospitals in England with the procurement of foetal scanners in February 2007. The saving resulted from the first national imaging e-auction in the NHS and was achieved through volume purchasing, with some suppliers also providing extended warranties and extra software. NHS Supply Chain (managed by DHL Logistics) was created in October 2006 when the NHS outsourced its buying. It claims it will generate £1 billion savings over the 10-year contract on the purchase and delivery of more than 500,000 products. (Supply Management, News, 5 July 2007)

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• NHS Supply Chain launched an online catalogue in October 2007, to make it

easier to buy and supply products for NHS trusts. ‘NHS-Cat’ is linked to the organisation’s ordering systems, and covers all 500,000 products. Suppliers can manage their own content, allowing them to immediately update prices and add product fact sheets. It is also linked to a new e-tendering and contracts management system.

Chapter 2: Regulation of private sector firms In Section 2, we discuss the reasons for, and impact of, regulation on private sector firms: a topic that has come up several times in recent exams (including a compulsory question part in the November 2009 exam). A hot topic at the moment is the building pressure towards formal regulation of the relationships between big retailers and their suppliers – particularly in the grocery market, where supermarkets make large profits by using their buying power to ‘squeeze’ suppliers. The New Economics Foundation (NEF) proposed the introduction of an independent watchdog to monitor the behaviour of supermarket buyers. It said a “retail monitor” could arbitrate in relationships to ensure fair deals and reduce the need for lengthy investigations. (Supply Management, News, 26 April 2007) ‘It isn’t just groups representing suppliers who are speaking out about perceived inequality. The New Economics Foundation and Friends of the Earth have added their support…. But groups calling for a watchdog are still undecided on the form and role such a third party should take. “We would like someone to have a two-part role, to enforce the rules and ensure everyone is acting in a proper way, and to offer best-practice models of working,” says the senior adviser, food chain relations at the National Farmers’ Union…. But a spokesman for the Forum of Private Business, which also supports introducing a regulator, says: “We want a watchdog that looks at the scale of market share and could look at the problems for suppliers and competition in the market”.’ Meanwhile, a statement from Tesco to the Competition Commission’s enquiry into the grocery market countered that ‘it was a victim of complaints from poor-performing retailers and suppliers, and that the reduction of costs in its supply chain were due to “skill and attention to detail”… Perhaps, as Sainsbury’s has said, a more responsible approach to relations from both sides could be the answer.’ Supply Management, 26 April 2007

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Chapters 3, 9-11: Purchasing in different environments Supply Management often supplies helpful case studies and examples in this area.

The purchasing of energy supplies (eg gas and electricity) is one ‘hot topic’ at the moment with rising prices and the threat of disruption to supply from Russia.

Another interesting example is purchasing’s role in IT purchases. The advice column in Supply Management (2 March 2006) suggests: The IT sector, in many instances, works on the principle that if you are not an IT specialist you can be of no added value to their process. The situation is often exacerbated by suppliers making a beeline for the IT department, deliberately cutting out purchasing.

Purchasing’s key contributions may be in areas such as:

Search for suppliers (where intellectual property rights do not dictate the supplier) Carrying out due diligence, supplier evaluation and risk analysis Negotiating price Negotiating contract terms (such as software upgrades, remedies for non-

performance) If you’d like to do some ‘case study’ spotting, you might also like to check out articles on: • Airline procurement: Supply Management, 23 August 2007, page 20 • Museum/gallery procurement: Supply Management, 6 June 2007, page 22 • Supermarket/retail procurement: Supply Management, 24 May 2007, page 18 • Voluntary/NFP sector procurement: Supply Management, 31 January 2008, page 20 Chapter 4: Organisation of purchasing In Section 2, we discuss the advantages of centralising purchasing (which has now come up several times in exam questions). As a good illustration:

• The Barclays Group announced in 2005 that it had decided to centralise its procurement function – with an expected saving of £20 million over 12 months. Sourcing – previously carried out separately for Barclays Global Investors, Barclaycard, Barclays Capital and the retail and corporate banking division – is now combined into a single global organisation.

• Financial services group Friends Provident set up a centralised procurement operation in October 2007 to manage its buying activity. The team of five comprises a procurement manager, an IT contracts manager, a senior buyer, an IT buyer and a procurement consultant. The business used to work in silos: different departments were using the same suppliers – with completely different arrangements. A consistent, centralised approach has enabled improved commercial arrangements. The team has taken over IT buying activity, previously spread across the firm’s five UK sites. It is not centralising all procurement activity, but providing guidance for the firm’s divisions. Some spend is therefore controlled by non-buyers, and the procurement team has prepared contract templates, methodologies and policies to help them, together with training and coaching. Trained buyers will lead high-value and high-risk purchases.

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Chapter 6: Consumer protection In Section 4, we discuss the legal framework on consumer protection in the UK (a topic which was tested by a short question in the May 2008 exam). You may like to follow the ongoing debate on this led by the EU Consumer Commission, following some major recalls of dangerous toys. Several toys, manufactured in China, were found to contain illegal levels of lead in pigments or magnets which could cause intestinal perforation, neurological damage, anaemia, kidney failure and reproductive problems. In another case, ‘Bindeez’ or ‘Aquadots’ (also from China) were found to be coated with a chemical that can turn into ‘date rape’ drug GHB if eaten. The EU Consumer Commission plans a review of toy safety and consumer product safety control mechanisms, warning member states and companies to ‘raise their game on enforcement of consumer safety law’. (Supply Management, 20 September 2007) Meanwhile, authorities in China have forbidden more than 750 toy manufacturers from exporting their products, in an effort to crack down on unsafe toys. (Supply Management,, 13 December 2007) Chapter 7: Purchasing cards In Section 6, we discuss the use of purchasing cards to reduce the costs of multiple small purchases. A feature on fraud prevention in Procurement Professional (Australia) also noted that purchasing cards are also a great way of removing expense from reimbursements and petty cash, enabling better expense management and a culture of greater expense visibility and accountability. The use of purchasing cards allows: • A measurable drop in expenses claims, through tighter controls • Better spend analysis for management information and fraud prevention • Integration with suppliers, so that organisational rules can be embedded into

purchase/approval processes (eg for travel bookings): the data from card transactions is information rich.

Procurement Professional, June/July 2007 Chapter 8: Competitive tendering Competitive tendering comes up regularly in the exams (mainly in connection with when it is appropriate, and what its benefits or ‘merits’ are, especially for public sector organisations). We discuss these topics in Sections 1-2 of the chapter.

An interesting case study is presented by procurement for the UK’s national ID card scheme.

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The Identity and Passport Service (IPS) has decided to set up a framework agreement for the £2 billion venture to provide biometric support, passport replacement, ID cards and other purchases. It hopes to overcome some of the problems of large-scale IT projects by having several potential suppliers – rather than one.

Framework agreements act as an approved contractor list, but do not guarantee business. They are traditionally used for supply of more routine purchases. However, in this case they give the buyer more time to firm up specific stage requirements; give the flexibility of not committing to a single supplier; prevent a single supplier from gaining excessive power; allow an under-performing supplier to be weeded out without penalties; and allow faster competitions for each contract.

‘After a nine-month selection process, five suppliers will be chosen via competitive dialogue for the National Identity Scheme Strategic Supplier Framework. They will then take part in mini-competitions for contracts valued between £50 million and £500 million, which could last for up to 10 years… The chosen long-term supplier for each project must meet criteria at every stage. If they fail, the supplier will be removed from the project and possibly the framework. “Termination for cause or convenience can be high-profile. Rather than terminating, we would simply be selecting not to award the next phase of work”.’ Supply Management, News, 23 August 2007 Chapter 12: International purchasing It might be helpful to gain an overview of the issues in whether to source locally or overseas (Section 2). In addition to the checklist on page 56 of your Passnotes, you might like to consider the article ‘10 Tricky Decisions’ (for overseas sourcing), Supply Management 16 February 2006.

‘Do you really want to go overseas?’ (‘Global sourcing for cost reasons alone may not be sustainable in the long term, and closing down more local options may lead to sourcing problems later on… Sourcing globally will also bring new requirements for the business – for example in compliance, traceability and financial reporting.’)

Crossed wires (‘Assuming that there is a common understanding with suppliers from different cultures can result in misunderstanding and dissatisfaction.’)

Costs (‘Companies can fail to consider all the financial implications of sourcing from abroad: low labour prices are only a small element of the total outlay.’)

‘Yet more regulations’ (‘Service agreements are always sensitive but the global dimension, with different legislation in various nations, adds its own twist of complexity.’)

Specification (‘Products can be described in different ways across the globe.’)

Inspections (‘Incorrect assumptions may be made about the ability of a given country to produce quality goods or services.’)

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Lead times (‘Global sourcing increases lead times. To compensate for this, purchasers often increase their minimum order quantity, but financing and carrying this extra inventory is expensive.’)

Flexible supply chain (‘Delays can be disastrous – especially for companies with limited options to re-route goods.’)

Intellectual property (‘Fighting counterfeiting is complex and expensive, and it can be difficult to prosecute in emerging markets.’)

Are your staff ready? (‘Companies that don’t train their procurement staff in the specialities of global sourcing increase risk and are more likely to miss out on efficiencies and savings opportunities.’)

Or, on an even more detailed level: What to ask of a foreign supplier

Is it an established business? Is it financially stable? Do you need a credit check? Does it have any quality marks? Are these UK recognised? Which other companies does it supply? Can it supply references? Does it belong to any trade bodies or professional organisations? Check with the business registrar in the country of the supplier to ensure that the

business is legitimate and licensed. (‘Should you go the distance?’, Marcus Austin, Supply Management, 28 April 2005). You may like to consider the risks and benefits of doing business with particular countries or regions, to have a ‘case study example’ up your sleeve. Various countries (including the United Arab Emirates and South Africa) have been featured in Supply Management: keep an eye out for features on countries that interest you. As a cautionary example, you might like to start with the troubles facing organisations that source from (or outsource to) China. Supply Management (13 December 2007) pointed out a ‘trio of bad tidings’:

• Economists forecast that the over-supply of cheap Chinese labour will not last much beyond 2010. As low-cost workers are the bedrock of the Chinese manufacturing boom, annual wage increases of 15% will soon erode its cost advantage over other countries.

• The introduction of new labour laws at the beginning of 2008 are also likely to increase costs in China. The legislation aims to outlaw poor employment practices, a move which will improve buyers/outsourcers’ CSR credentials – but also increase costs.

• Quality problems continue to plague Chinese production and export. Hundreds of Chinese toy manufacturers, for example, have had their export licences removed in the interests of consumer safety. While this demonstrates that checks and enforcement are beginning to gain ground, it also highlights continuing quality and safety problems.

The conclusion: ‘China won’t always be the obvious answer for manufacturing outsourcing.’

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QUOTABLE On Corporate Social Responsibility (Chapter1 ) ‘The business of business is business, and companies should leave it to legislators to pass laws against socially irresponsible acts and to consumers to vote with their purses against socially irresponsible companies’. (Milton Friedman) We discuss CSR in the chapter on public sector organisations, but the argument for CSR is (as this quote indicates) a little more contentious for business organisations. This comment is a useful reminder (a) that there is a counter-argument to CSR for its own sake and (b) of the major influences on organisational responsibility: law and self-interest… However: ‘Future generations will neither excuse nor forgive us for ignoring the signals we see today. They will not accept that it was too difficult or too costly to keep our economic aspirations in balance with the impact on the environment and the effect our decisions will inevitably have on society’. (Sir Neville Simms, chairman of the Sustainable Procurement Task Force) On Competitive advantage (Chapter 3) ‘Competitive advantage results from a firm’s ability to perform the required activities at a collectively lower cost than rivals, or perform some activities in unique ways that create buyer value and hence allow the firm to command a premium price’. (Michael Porte) This quote is cited in Section 1, but we think it’s worth highlighting: a useful support for questions on value and added value, competitive advantage, ways of improving supply chain performance, and/or purchasing’s contribution to organisational performance.

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MEMORY BOOSTERS Chapter 12, Section 4: Incoterms Getting the name ‘Incoterms’ right is a problem for some students. The simple way to remember it correctly is to remember what it stands for: In ternational Co ntract Term LINKS For an interesting ‘hub’ for case studies, articles and discussions about supply management (among other) issues, try: http://www.about.com/business (Just bear in mind that it’s a US site…) And of course, check Supply Management journal, if you haven’t read it lately… http://www.supplymanagement.co.uk The Office of Government Commerce has published helpful guidance notes on public sector procurement and related legislation. Have a look at: http://www.ogc.gov.uk/procurementpolicy And for more information on consumer protection issues and legislation (including a very handy checklist of all UK legislation affecting consumer protection and intellectual property), see Trading Standards Central: http:www.tradingstandards.gov.uk

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CAN YOU TEST ME ON THIS? Although the syllabus now uses the case study and essay format, it is still designed to test your knowledge: you are expected to show awareness and understanding of concepts, theories and models – not just practical experience and common sense! At Level 3, there are often ‘short answer’ questions, in the form of 5-mark question parts asking you to define terms or draw models. There are quick Self-Test questions at the end of each chapter in your Course Book. Here are a few more, to help you identify areas for closer reading or revision. Some people like doing quizzes and questionnaires! Try and think of this as fun… Test your knowledge quiz 1. List three differences in the purchasing issues facing buyers in the public and

private sectors.

2. Give four examples of stakeholder groups in a public sector organisation.

3. ‘The Articles of Association of a company define whether it is a public or private limited company.’ True or false?

4. Give two examples of forms of strategic alliance that would be suitable for (a) loose (market) relationships and (b) joint ownership relationships.

5. Identify two particular challenges for purchasing in the (a) extractive sector, (b) FMCG sector and (c) retail sector.

6. Give three examples each of strategic, tactical and operational responsibilities of purchasing.

7. What is the value of seeing buyer-supplier relationships as a ‘supply chain’ or as a ‘supply network’?

8. What purchasing activities might be suitable to outsource, and in what circumstances?

9. Give three examples of techniques for gathering customer feedback.

10. List five items that would be included in a B2B customer database.

11. List three competitive advantages of using cross-functional teams in purchasing.

12. Define (a) spot buying, (b) systems contracts and (c) purchasing cards.

13. Distinguish between ‘selective’ and ‘open’ tendering.

14. List three benefits of a benchmarking exercise for purchasing.

15. Identify three key issues in the purchasing of perishable goods.

16. What are the particular challenges of purchasing services?

17. What is the difference between capital and operational expenditure?

18. What is the ‘payback period’ of an investment?

19. What are the four drivers of globalisation, according to Yip?

20. List five key issues in international sourcing.

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Answers 1. Three areas of difference in public/private sector purchasing are:

accountability to stakeholders; budgetary control and cash limits; diversity of items purchased; and regulation (eg Public Sector directives) (See Chapter 1, Section 1.)

2. Public sector stakeholders include: government, funding bodies, management, staff, users, beneficiaries (See Chapter 1, Table 1.2.)

3. False. The Memorandum of Association defines its status as ‘Ltd’ or ‘plc’. (See Chapter 2, Section 1.)

4. For loose (market) relationships: networks or opportunistic alliances. For joint ownership: consortia or joint venture. (See Chapter 2, Figure 2.1.)

5. Challenges in the extractive sector include: remote/difficult locations and the need for emergency or standby supplies. Challenges in the FMCG sector include: the need for competitive branding and the need for agile supply chains to keep pace with short product lifecycles. Challenges in the retail sector include: purchasing goods which will appeal to consumers, and developing closer supplier relations. (See Chapter 3, Sections 1, 4 and 5.)

6. Strategic responsibilities include: developing guidelines and procedures. Tactical responsibilities include: preparing specifications. Operational responsibilities include: expediting. (See Chapter 4, Table 4.1.)

7. The supply chain concept emphasises mutual dependence, the need for linkage or integration, and the importance of all links in delivering customer value. The network concept emphasises the complexity of supply linkages. (See Chapter 5, Section 2.)

8. See Chapter 5, Table 5.5 for a full range of points.

9. Techniques for gathering customer feedback include: observation, depth interviews, experimentation, focus groups, survey research, test marketing or online techniques. (See Chapter 6, Section 2.)

10. A B2B customer database might include items such as: products/services bought; past volumes and prices; key contacts; competitive suppliers; status of current contracts; estimated expenditure; SWOT for servicing the account. (See Chapter 6, Table 6.2.)

11. Advantages of using cross-functional teams include: reduction in task time; improved ability to solve problems; improved customer focus; improved creativity and learning. (See Chapter 7, Section 4.)

12. Spot buying is where the buyer sees a need, contacts a supplier, agrees a price and orders the product to fulfil the need. Systems contracts are where a master contract is negotiated with a supplier, specifying items, prices and delivery terms: when demand arises, staff call for releases against the master contract. Purchasing cards are corporate credit cards, often used for small-value purchases. (See Chapter 7, Sections 5 and 6.)

13. Selective tendering is where a few pre-qualified suppliers are invited to bid. Open tendering is where a tender is publically advertised, and bids are

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solicited from any supplier who is capable of doing the work. (See Chapter 8, Section 1 and Table 8.2.)

14. Benefits of benchmarking purchasing include: moving to performance-based evaluation; systematic criteria and approach; realistic yet challenging targets; stimulating customer research; generates new ideas; and can identify areas for improvement. (See Chapter 8, Section 4.)

15. Issues in purchasing perishable goods include: need for quality control of goods inwards; need for careful transportation and storage; and physical risks of deteriorated goods (eg chemicals). (See Chapter 9, Section 2.)

16. Challenges of purchasing services include: intangibility; lack of uniformity; difficulty specifying and measuring quality; and possible change in specification over the life of a service contract. (See Chapter 10, Section 3.)

17. Compared to operational expenditure, capital expenditure often involves whole-life costs; the monetary value is higher, requiring specialised evaluation/control techniques; the purchase is non-recurring; the benefits are longer-term and more intangible; specifications are more complex; and negotiations are more extensive. (See Chapter 11, Section 1.)

18. The payback period (or recovery period) refers to how long it will take for the benefits of an investment to pay back the outlay. (See Chapter 11, Section 2.)

19. Yip’s four drivers of globalisation are: market, cost, government and competition factors. (See Chapter 12, Section 1.)

20. Key issues in international sourcing include: lengths of supply lines; language differences; cultural differences; legal system differences; exchange rate risk; transport risk; and payment risk. (See Chapter 12, Section 2.)

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PURCHASING CONTEXTS: COURSE BOOK BONUS …profex.co.uk/secureassets/files/Contexts_BonusPack_2.pdf · seeking to enhance its bargaining power and ... when the object lesson of British