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111 Cards in this Set
- Front
- Back
- 3rd side (hint)
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What are business needs?
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• An organisation needs certain inputs in order to perform its activities and pursueits objectives • The planners of business activities, and theusers of inputs, typically notify the procurement function of theserequirements, in various ways • Thetask of procurement is to fulfil the input requirements, by achieving what areoften called the five rights of procurement |
need, initiator notify, fulfill input |
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Development ofprocurement |
• Passive • Independent • Supportive • Integrative |
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A generic procurementcycle |
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Type of purchase |
• Straight re-buy of items already sourced from asupplier • Modified re-buy, where some of the requirement haschanged • New buy, where the requirement has not previously beenspecified or sourced |
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Capital procurements |
• Systematicappraisal of the benefits, costs and risks of the investment, and likely‘payback’ period of the investment • Balancing the whole life costs and performance,functionality and quality of the asset • Negotiation, specification and contracting with thechosen supplier for a total ‘package’ of benefits sought over the asset’slifecycle • Analysis andmanagement of lifecycle costs • Management and maintenance of the asset in such a wayas to prolong its useful life and maximise its residual value on disposal d |
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The Kraljic procurement portfolio matrix |
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Thebusiness case process |
• Fostering strategic, business-focusedthinking • Improving the efficiency and quality ofdecision-making • Enabling management to evaluate proposals forfeasibility, suitability and acceptability • Enabling management to compare alternatives andoptions • Establishingmeasurable yardsticks by which the subsequent performance, deliverables oroutcomes of projects can be evaluated • Is the project or asset achieving the business casebenefits anticipated? • Are the assumptions made in the business case turningout to be accurate? • Is the business case justification for the projectstill valid? |
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Informal businesscase structure |
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Elements of a comprehensive formal business case |
• Executive summary • Reference • Context • Value proposition • Scope • Deliverables • Impacts • Work planning • Resource requirements • Risk management andcontingency plans • Commitments |
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Business benefits |
• Fulfilment of aspecific business objective • Increased revenues • Reduced costs • Enhanced profitability • Enhanced value formoney • Enhanced shareholdervalue • Competitive advantage • Leverage of keyresources • Increased capacity,capability or flexibility • Improved brand orreputational equity t |
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ADVANTAGESOF OUTRIGHT PURCHASE |
1. Total costis low, compared to rental 2. The userhas total control over the use of the asset 3. The assetmay have residual re-sale value at the end of use 4. Capitalallowances may be set against tax, and government grants may be available |
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DISADVANTAGESOF OUTRIGHT PURCHASE |
1. Highinitial expenditure ties up capital 2. User bearsall costs and risks of maintenance, operation and disposal 3. Risk oftechnological obsolescence 4. Wasteful,if equipment is needed only for a short period (eg a particular project) |
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ADVANTAGESOF LEASING |
1. No initialinvestment to tie up capital 2. Protectsagainst technological obsolescence 3. Costs areknown and agreed in advance 4. Fewercomplex tax and depreciation calculations 5. Hedgeagainst inflation, as payments are made in ‘real’ money terms |
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DISADVANTAGESOF LEASING |
1. Long-termcommitment to pay instalments 2. User doesnot have total control of asset 3. Total costmay be higher than purchase 4. Largeorganisations may get better terms by securing their own finance to purchase(benefiting from capital allowances) 5. Contractterms may favour the lessor (eg limitations to use, liability for risks andcosts) |
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Alignment withtactical objectives and timescales |
• Secure supply within the timescales required by widerproduction, marketing or project plans • Secure adequate levels of performance and processcontrol within the timescales required by wider organisational and projectplans • Be feasible withinexisting resource constraints • Be capable of fulfilling agreed specifications andachieving agreed objectives, standards, targets and KPIs |
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Market data on costs and prices |
• Price is what a seller charges for a package ofbenefits offered to a buyer. • Cost is what the buying organisation pays to acquirethe goods or services purchased. This may be much more than just the purchaseprice paid to the seller. |
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Primary sources of market data on costs and prices |
• Communication with suppliers • The buyer’s database of market data • The marketing communications of suppliers • Online market exchanges, auction sites and forums • Advisory and information services • Trade fairs, exhibitions and conferences • Informal networking and information exchange |
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Secondary sources of market data on costs and prices |
• Financial and tradeor industry press • Published economicindices • Published and onlinemarket analysis • Published statistical surveys compiled by thegovernment • Price listing andprice comparison websites |
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Factors in supplier pricing decisions (External factors) |
• Pricescharged by competitors • Extent of competition(market structure) • The nature ofcompetition in the market • Marketconditions • Customerperceptions of value • Priceelasticity of demand • What a particular (desirable, powerful) customer isprepared to pay • Environmental factors affecting the cost of rawmaterials • Environmental factors affecting demand andaffordability |
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Factors in supplier pricing decisions (Internal factors) |
• Costsof production and sales • Howbadly the supplier needs the business • Riskmanagement • How attractive aparticular customer is • Financialposition and product portfolio • Where the product isin its ‘lifecycle’ • Shareholders’expectations and managerial objectives in regard to profit margins • Thestrategic objectives of the organisation |
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Supplier pricing strategies-Cost-based pricing |
• Full-cost pricing • Cost-plus or mark-uppricing • Marginal pricing • Rate of return or‘target return’ pricing • Contribution pricing |
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Supplier pricing strategies |
• Price volume • Market share pricing(or penetration pricing): • Market skimming • Current revenuepricing (or contribution pricing) • Promotional pricing • Market segment pricing (also called differentialpricing or price discrimination) • Competition pricing(or dynamic pricing) |
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Components of thecost base |
• Raw materials (and/or components, subassemblies andconsumables) • Labour • Overheads |
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Lifecycle costing |
Total cost ofownership includes not just the price of the items being purchased, but also: • Various transactioncosts • Finance costs • Acquisition costs • Operating costs • Costs of storage and other handling, assembly orfinishing required • Costs of quality • End of life costs |
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Benefits of WLC |
• Enablingthe fair (like-with-like) comparison of competing options • Enabling realistic budgeting over the life of theasset • Highlighting, at an early stage, risks associated withthe purchase • Promotingcross-functional communication on cost and asset management issues, andimproving awareness of total costs • Supportingthe optimisation of value for money |
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Limitationsof WLC |
• It isnot an exact science, and future cost estimates are subjective • Manycosts are incurred through the life of a product or asset, and not all of thesewill be easy to forecast • Awide range of intervening factors may affect costs over the lifecycle of aproduct or asset • A systematic WLC exercise can be time-consuming,labour-intensive and costly |
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Statisticalforecasting techniques |
• Simple moving average • Weighted average (orexponential smoothing) • Time series (trend)analysis • Regression analysis |
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Estimating orpredicting costs |
1. What are the direct or variable costs of sales? 2. What are the indirector fixed costs or overheads? • Premises costs • Labour and staff costs • Utilities • Printing, postage andstationery • Equipment costs • Fleet and vehiclecosts • Advertising, promotionand sales activities • Financing costs • Legal andprofessional costs (including insurance) • What are the one-off capital costs for the period orproject? |
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Objectivesof preparing a budget |
• To express organisational objectives as operationaltargets • To communicate plansand targets to stakeholders • To motivate people to attain performance and costtargets • To motivate managersto identify risks and problems • To measure unit orproject performance • To help evaluatemanagerial performance • To pre-authorise estimated levels of expenditure forprocurement activities • To co-ordinateoperations • To control procurement activities and costs |
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Types of budget |
• Incremental budget • Zero-based budget |
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Actual income entries |
• Entering actual income or revenue figures againstestimates • Analysing the reasons for lower than expected turnover • Analysing the reasons for higher than expectedturnover • Taking action to prevent further shortfalls, orrevising the budget to reflect more realistic expectations |
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Actual cost entries |
• Entering actual costs or expenditures as they occuragainst the budgeted amounts • Analysing how fixed costs differed from the budgetedamount • Verifying that variable costs were in line with thebudget • Analysing any reasons for changes in the relationshipbetween costs and turnover • Analysing any differences in the timing of actual andbudgeted expenditures |
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Operating the cashbudget |
• Forecast sales • Forecast the time-lagon converting debtors to cash • Determine purchaserequirements • Forecast the time-lagon paying suppliers • Incorporate othercash payments and receipts • Collate this information so as to find the netcashflows |
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Cash outflows |
• Purchases • Staff salaries or wages and benefits, rents and dailyoperating expenses • VAT, National Insurance contributions, corporation taxand similar payments • Loan repayments |
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The role of aspecification |
• To define therequirement • To communicate therequirement • To provide a means of evaluating the quality orconformance of the goods or services supplied |
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Zero defects |
• Specifications • Supplier pre-qualification, selection and appraisal • Quality control • Costs • The buyer’s quality management |
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Advantages of using specifications |
• The process of drawing up specifications is a usefuldiscipline • If items are to be purchased from more than onesource, the use of conformance specifications may be essential to ensureuniformity • Specifications provide useful criteria for measuringthe quality and acceptability of purchases once delivered • Specifications provide evidence, in the event of adispute, as to what the purchaser required |
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Disadvantages ofusing specifications |
• Detailedspecification is an expensive and time consuming process • The costs of inspection and quality control aregreater for complex specifications than if simple specification is used • Specificationscan become too firmly embedded • Specificationscan create a temptation to over-specify, adding cost and increasing stockvariation and proliferation |
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Types of specification Conformance |
The buyer detailsexactly what the required product, part or material must consist of. This maytake the form of an engineering drawing or blueprint, a chemical formula or‘recipe’ of ingredients, or a sample of the product to be duplicated, forexample. The supplier may not know in detail, or even at all, what function theproduct will play in the buyer’s operations. The supplier’s task is simply toconform to the description provided by the buyer.46\ |
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Types of specification Performance |
The buyer describes:what it expects a part or material to be able to achieve, in terms of thefunctions it will perform and the level of performance it should reach; or whatoutputs or outcomes (results) it expects to be delivered by a service. It is upto the supplier to furnish a product or service which will satisfy theserequirements: the buyer specifies the ‘ends’, and the supplier has relativeflexibility as to ‘means’ of achieving those ends. |
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Technical or designspecifications |
• The scope of the specification (its objectives andcontent) • Definitions: explanation of any technical orspecialised terms used • Thepurpose of the equipment or material that is the subject of the specification • Referenceto any related documents (such as standards or legislation) which apply • Materialsrequirements, properties, tolerances and permissible variability • Desiredappearance, texture and finish requirements of the finished product • Drawings, samples ormodels of the required product (where available) • Conditionsunder which the item or material is to be installed, used, manufactured orstored • Maintenance and reliability requirements • Specification of packaging and protection • Information to be provided by the supplier for users |
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Typesof conformance specifications |
• Technical or designspecifications • Specification bychemical or physical properties • Specification by brand • Specification bysample • Specification bymarket grade • Specification bystandards |
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Performance specifications |
A performance specification would typically include: • The functionality, performance, capabilities, outputsor outcomes to be achieved, within specified tolerances • The key process inputs which will contribute toperformance • The operating environment and conditions in which theperformance is to be achieved (and extreme or unusual conditions in which it isnot expected) • How the product is required to interface with otherelements of the process • Required quality levels (including any relevantstandards) • Required health and safety levels and controls • Required environmental performance levels and controls • Criteriaand methods to be used to measure whether the desired function, performance oroutcomes have been achieved p |
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The ‘Triple BottomLine’ concept |
• Economic sustainability (Profit) • Environmental sustainability (Planet) • Social sustainability (People) |
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Drafting specifications |
An effective specification is one that is: • Clear and unambiguous as to what is required • Concise • Comprehensive • Compliant with all relevant standards, and health,safety and environmental laws and regulations • Up-to-date • Expressed in terms which can be understood by all keystakeholders • Value-analysed |
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Cross-functional contributions to specification |
The contribution of procurement professionals: • Supply marketawareness • Supplier contacts • Awareness ofcommercial aspects of purchases • Awareness of legalaspects of purchases • Purchasing disciplines |
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Approachesto specification development |
• Early buyerinvolvement (EBI) • Formal committeeapproach • Informal approach • Purchasingco-ordinator approach |
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The buyer’s role inspecification: |
• Understanding the needs of users • Liaising with users • Minimising tolerances • Understanding thelegal implications of specification |
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Purchasing experts may provide the followingcontributions: |
• Input to make/do orbuy decisions • Policy formulationfor supplier involvement and internal purchasing • Monitoringof supply markets • Pre-selectionof suppliers • Supplierrelationship management • Ordering andexpediting of samples and prototypes from suppliers • Information on newproducts and technologies • Suggestion ofalternative suppliers, products or technologies • Evaluationof product designs • Promotion ofstandardisation, variety reduction and simplification |
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Technicalrequirements |
• Intended function orperformance • Conditions under which the product or service will berequired to operate, be transported, handled and stored • Measures of qualityand performance • Tolerances for reliability, quality, dimension,strength and other key properties • Features: texture, colour, aesthetics, finishing andother external properties • Durability andserviceability • Information provided with the product or service |
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Company policy |
The buying organisation may have a wide range ofpolicies embracing areas such as: • Itsintention to comply with all relevant laws, regulations, standards, codes ofpractice and best practice benchmarks • Its aspirations for environmental sourcing andmanufacture • Its aspirations for corporate social responsibilityand ethical trading • Sourcing policies • Quality, cost andpricing policies |
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Standardisation |
Standardisation is a voluntary process, based onconsensus among different stakeholders such as: • National and international standardisationorganisations, led globally by the International Standards Organisation (ISO) • National publicauthorities • Industry and business associations, includingrepresentatives of SMEs • Non-governmentalorganisations (NGOs) • Scientific andacademic organisations |
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Unnecessary stockproliferation |
• Unnecessary stockholding and handling costs, asadditional variants are stocked • Unnecessaryspecification costs and transaction costs • Multiple small ordersof variant items • The risk of lowerquality • The risk of waste |
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Benefits ofstandardisation |
• Specification • Purchasing • Transport • Inventory • Quality management |
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Environmentalcriteria |
• Location in relationto the buyer and lower tiers of supply • The use of less, and‘greener’, materials and packaging • ‘Green’ design and innovation capability; reverselogistics and recycling capability; and so on • The development and enforcement of strongenvironmental policies • Robust environmentalmanagement systems • Compliance with environmental protection and emissionslaw and regulation in the country of operation |
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CSRand social sustainability criteria |
• The development of robust CSR policies and ethicalcodes • Location in relationto the buyer • Evidence of responsible and ethical labour policiesand practices • Evidence of, and commitment to, conformance torelevant legislation and regulations • Compliance with International Labour Organisationstandards • Evidence of ethicaltrading policies and practices • Compliance with Fair Trade standards, or membership ofthe Ethical Trading Initiative • Commitment to transparency and improvement, incollaboration with the buyer |
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Sustainable specification across sectors andindustries |
• Vehicles Fuel efficiency • Paper Recycled, chlorine-free, sustainable forestrymanagement • Office Energy efficient, cleanmanufacturing processes, equipment safety, end-of-life take-back • Energy Renewable • Food and Organic, fresh or seasonal, hygienicprocesses, beverage minimised packaging, sustainable water management |
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What is informationassurance? |
• Corporate governance: regulatory standards compliance,internal controls and auditing in regard to data protection, IT systems andfraud prevention • Contingency, business continuity and disaster recoveryplanning in relation to key systems risks • Strategic development and management of IT systems tofulfil the current and future needs of the organisation (and supply chain) |
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Information-relatedrisks |
• Risks to the organisation’s intellectual capital • Risks to the integrity and security of data • Risks to the integrity and value of specification data • Risks and inefficiencies in the design andimplementation of management information systems, specifications databases,inventory systems, extranets and other relevant systems • Turnover of key personnel and loss of theirintellectual property and/or knowledge of the organisation’s procurement needs,supply market, stock or technical specifications • Loss of organisational knowledge, information andcapabilities |
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What is performance measurement? |
Supplier performance measurement is the assessment andcomparison of a supplier’s current performance against: • Defined performancecriteria • Previous performance • The performance of other comparable organisations (egother suppliers) or standard benchmarks |
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SMARTperformance measures |
• Specific • Measurable • Attainable • Relevant • Time-bounded |
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Four types ofbenchmarking: |
• Internal benchmarking • Competitor benchmarking • Functional benchmarking • Generic benchmarking |
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Measures of quality |
• Performance • Features • Reliability • Durability • Conformance • Serviceability • Aesthetics • Perceived quality |
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Benefits of effectiveSLAs |
• Theclear identification of customers and providers, in relation to specificservices • The focusing of attention on what services actuallyinvolve and achieve • Identificationof the real service requirements of the customer, and potential for costs to bereduced by cutting services or levels of service that (a) are unnecessary and(b) do not add value • Bettercustomer awareness of what services they receive, what they are entitled toexpect, and what additional services or levels of service a provider can offer • Bettercustomer awareness of what a service or level of service costs, for realisticcost-benefit evaluation • Support for the ongoing monitoring and periodic reviewof services and service levels • Support for problem solving and improvement planning • Thefostering of better understanding and trust between providers and customers |
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Contents of an SLA |
• What services areincluded • Standards or levelsof service expected from the provider • Other expectations ofthe supplier • The allocation of responsibility for activities, risksand costs • How services and service levels will be monitored andreviewed, what measures of evaluation will be used, and how problems (if any)will be addressed • How complaints anddisputes will be managed • When and how the agreement will be reviewed andrevised |
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General examples of purchasing service KPIs |
• Number of complaints made to purchasing by internalcustomers, external customers or suppliers (and found to have merit) • Number or proportion of supply orders deliveredon-time-in-full and of specified quality • Number of stockoutsreported • Value of costreductions or savings achieved per period • Number of projectscompleted to customer satisfaction • Lead times to fulfilthe purchase cycle • Qualitativeassessments of desired values |
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What is a contract? |
A contract is basically a statement of: • Exactly what two or more parties have agreed to do orexchange • Conditions and contingencies which may alter thearrangement • The rights of each party if the other fails to do whatit has agreed to do • How responsibility or ‘liability’ will be apportionedin the event of problems • How any disputes willbe resolved d |
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Contract Terms |
• Express Terms –explicitly stated (whether written or oral) • Implied Terms – not expressly included in thecontract, but nevertheless assumed to exist The‘importance’ of the term is distinguished as: • Conditions – vital terms of the contract, such that abreach will entitle the injured party to cancel or ‘repudiate’ contract andseek damages in addition • Warranties – non-vital terms, the breach of which willnot collapse the contract and the injured party can only seek damages, but bothparties must continue to honour the contract |
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Implied terms |
Terms may be implied into a contract by virtue of: • The nature of thecontract • The need for businessefficacy • Statute law • Custom of the trade |
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Sale of Goods Act 1979 (UK) |
Legal principles relating to contracts for the sale of goods:• Sale by description • Satisfactory qualityand fitness for purpose • Sale by sample Supplyof Goods and Services Act • Care and Skill • Time of performance |
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Model form contracts |
• CIPS has published a range of model form contracts andcontract clauses • The Freight Transport Association has developed amodel form of conditions of carriage, for carriage of goods by road in the UK • The Chartered Institute of Building has developed amodel form contract for the commissioning of facilities management services • The Joint Contracts Tribunal (JCT) publishes aStandard Form of Building Contract • TheInstitute of Civil Engineers (ICE), the Association of Consulting Engineers andthe Federation of Civil Engineering Contractors issue standard forms for civilengineering |
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Advantages of model form contracts |
1. Helps reduce time and costs of contract development 2. Avoids ‘reinventing the wheel’ 3. Industry model forms are widely accepted 4. Designed to be fair to both parties |
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Disadvantages of model form contracts |
1. Terms may not be as advantageous to a powerful buyeras if contract was negotiated 2. Terms may not include special clauses 3. Legal advice is still required if significantamendments or variations are to be made 4. Costs of training buyers to use modelforms |
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Interpreting keyterms |
• What type of clause they are and what they aredesigned to achieve • The legal and operational effects or implications ofthe clause for the buyer and the supplier • Whether the example clause, as given, expresses thebuyer’s requirements (and best interests) clearly |
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Interpreting basiccontract terms: |
• Time of Performance “timely deliveryof….. Shall be of the essence of the contract” • Passing of title/property Retention of title /Romalpa clause • Liquidated damages Liquidated,unliquidated, and penalty clauses • Force Majeure • Exclusion clause Incorporation Negligence and UCTA • Subcontracting |
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A breach of contract occurs: |
• When a party fails to perform an obligation under thecontract: is in breach of a condition; improperly repudiates (ends) thecontract; or prevents completion of the contract on his own side or by theother party, during performance. These are examples of ‘actualbreach’. • When, before the time fixed to perform an obligation,a party expressly or by implication repudiates the obligations imposed on himby the contract: ie shows an intention not to perform. Thisis called ‘anticipatory breach’. ur.kua-繵 |
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Examples of‘frustration’ |
• Destruction of thecontract subject matter • Non-occurrence of the event on which the contract wasbased • Incapacity to providepersonal performance • Extensive interruption which makes further executionof the contract impracticable or different from that originally agreed |
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Insurances |
• Employer’s liability insurance • Public liability insurance • Professional indemnity insurance • Product liability insurance |
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Ethical sourcing andsupply |
• The promotion of fair, open and transparentcompetition in sourcing • The use of sourcing policies to promote positivesocio-economic goals • The specification andsourcing of ethically produced inputs • The selection, management and development of suppliersin such a way as to promote ethical trading, environmental responsibility andlabour standards at all tiers of the supply chain • A commitment to supporting the improvement of workingterms and conditions throughout the supply chain • A commitment tosupporting sustainable profit-taking by suppliers • Adherence to the ethical frameworks and codes ofconduct of relevant bodies • A commitment to compliance with all relevant laws andregulations for consumer, supplier and worker protection |
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What is the ‘right price’ for Supplier? |
The ‘right price’ for the supplier or seller to charge(the sales price) will be: • A price which ‘themarket will bear’ • A price which allows the seller to win business, incompetition with other suppliers • A price which allows the seller at least to cover itscosts, and ideally to make a healthy profit |
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What is the ‘right price’ for Buyer? |
The ‘right price’ for the buyer to pay (the purchasingprice) will be:• A price which thepurchaser can afford • A price which appears fair and reasonable, orrepresents value for money, for the total package of benefits being purchased • A price which givesthe purchaser a cost or quality advantage • A price whichreflects sound purchasing practices |
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Reasons forcost/price variations |
• Under-estimation of costs at the forecasting stage • Price inflation, escalating materials costs • Wage inflation, escalating labour costs • Commodity and energy price fluctuations • Exchange rate fluctuations • Overtime or incentive payments required to ‘crash’ theschedule • Failure costsincurred by unforeseen quality problems • Changes in the scope of the contract • Unforeseen contingencies |
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Indexation and price adjustment formulae |
The calculation of average changes in the price orcost of an item or group of items over a period of time can be used to: • Estimate the current average prices or costs of aproduct, by using price/cost data for similar items at a previous ‘base’ date • Eliminate the effects of inflation or deflation whenanalysing price and cost trends • Allow for currencyfluctuations • Compare the costperformance of different suppliers • Identify and defineaverage price/cost changes |
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Cost-plus pricing |
• A cost plus fixed fee (CPFF) contract includes paymentof allowed costs plus a pre-determined fixed amount, as the fee for doing thework • A cost plus incentive fee (CPIF) contract includespayment of allowed costs plus a higher fee for meeting or exceeding performanceor cost targets or KPIs • A cost plus award fee (CPAF) contract includes paymentof allowed costs plus a fee (bonus) based on the contractor’s performance |
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Alternativearrangements |
• Cost without fee, for non-profit-making providers • Cost sharing, where the supplier stands to benefitfrom its own work • Time and materials, for contracts (such as repairservices) where the precise work to be done cannot be predicted in advance |
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Payment methods |
Payment methods • Payment in advance (or payment with order) • Payment on delivery • Open account or credit |
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Statutory remediesfor an unpaid seller |
An unpaid seller’s remedies against the goods include: • The right of seller’slien (ss 41–43 SGA 1979) • The right of stoppagein transit (ss 45–46) • The right of resale(s 48) |
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Factors in make/do orbuy decisions |
FACTORS SUPPORTING MAKING/DOING -Opportunity toextract value from otherwise idle capacity and resources - Potential for lead time reduction - Cost of work is known in advance - Desire to exert direct control overproduction and/or quality - Protection of confidentiality and intellectualproperty - Less supply risk and supplier risk - Desire to maintain a stable workforce |
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FACTORS SUPPORTING BUYING IN |
-Quantities required are too small for economicproduction -Avoid costs of specialist machinery andlabour -Reduced inventory costs -Financial risk shared with supply chain - Access tocontractor’s specialist research, expertise, technology, patents, designs andso on - Augmented production capacity - Desire to maintain a stable workforce |
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Supply chainmanagement |
• ‘The management of upstream and downstreamrelationships with suppliers and customers to deliver superior customer valueat less cost to the supply chain as a whole’ (Christopher) • ‘The integration and management of supply chainorganisations and activities through co-operative organisational relationships,effective business processes, and high levels of information sharing to createhigh-performing value systems that provide member organisations a sustainablecompetitive advantage’ (Handfield & Nichols) |
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Drivers foroutsourcing |
• Quality drivers • Cost drivers • Business focus drivers • Financial drivers • Relationship drivers • Human resource drivers |
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Advantages of outsourcing |
*Supportsorganisational rationalisation and downsizing *Allows focused investment of managerial,staff and other resources on the organisation’s core activities andcompetencies * Accessesand leverages the specialist expertise, technology and resources of contractors *Access to economies of scale * Addscompetitive performance incentives *Leverages collaborative supply relationships, and can support synergies(2 + 2 = 5) *Cost certainty for activities where demand and costsare uncertain or fluctuating |
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Disadvantages of outsourcing |
* Potentially higher cost of services (includingcontractor profit margin), contracting and management * Difficulty of ensuring service quality andconsistency and corporate social responsibility * Potential loss of in-house expertise, knowledge,contacts or technologies in the service area * Potential loss of control over key areasof performance and risk: over-dependence on suppliers * Added distance from the customer or end-user, byhaving an intermediary service provider * Risks of ‘lock in’ to an incompatible or under-performing relationship:cultural or ethical incompatibility; relationship management difficulties;contractor inflexibility, conflict of interest, complacency or loss of clientfocus *Risks of loss of control over confidential data andintellectual property *Ethical and employee relationsissues of transfer or cessation of activities *Potential risks, costs and difficulties of in-sourcingif the outsource arrangement fails |
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Why does it go wrong? |
• The organisation fails to distinguish correctlybetween core and non-core activities • The organisationfails to identify and select a suitable supplier • The organisation has unrealistic expectations of theoutsource provider • The outsourcing contract contains inadequate orinappropriate terms and conditions • The contract does not contain well defined keyperformance indicators or service levels • The organisation lacks management skills to controlsupplier performance and relationships • The organisation gradually surrenders control ofperformance to the contractor |
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Key sourcing issues |
• The need for the outsource decision to be based onclear objectives and measurable benefits, with a rigorous cost-benefit analysis • The need for rigoroussupplier selection • Rigorous suppliercontracting • Clear and agreed service levels, standards and keyperformance indicators • Consistent and rigorous monitoring of service deliveryand quality • Ongoing contract andsupplier management • Contract review |
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Advantages ofinternal supply |
• The transaction costs are low • The relationship between ‘customer’ and ‘supplier’ islikely to be long-term and stable • There is (usually) no profit motive within theinternal supplier • Customer and supplier are part of the sameorganisation, meaning that they should share the same culture and values |
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The business case for outsourcing |
The main criteria for making a business case for anyprocurement proposal are: • Costs and benefits • Evaluation of options • Alignment withorganisational needs and timescales |
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Operationalarguments for outsourcing |
• The outsourcer may be unable to keep up with the paceof technological change in a particular activity • The outsourcer may simply lack capability or capacityto perform the activity competitively • The outsourcer may be able to transfer the resourcesused to make/do to another activity which will save cost or increase revenue |
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Consideration ofoptions |
• Produce the goods or services in-house (if this can bedone competitively) • License the technology or designs to externalproducers, to make or deliver under licence or franchise • Buy from a qualified external supplier • Establish a joint development project with another organisation • Enter a long-termdevelopment or supply partnership • Acquire a world-classsupplier (backward integration) |
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The ‘10 Cs’ model |
• Competence (or capability) • Capacity • Commitment • Control • Cash • Consistency • Cost • Compatibility • Compliance • Communication |
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Post-contractmanagement |
• There will be obligations and actions to be followedup on either side • If risk events or contingencies arise, the contractmay (or may not) lay down how they should be handled • Ifthe outsource supplier shows signs of struggling to conform with contractrequirements, agreed standards or service levels, remedial or corrective actionmay have to be taken • If performance fails to conform to agreed terms andstandards, there will be a variety of options for pursuing and escalating thedispute, enforcing the terms of the contract or gaining remedies • Circumstances and requirements will often change overthe life of a long-term services contract, and terms may have to bere-negotiated, agreed and amended accordingly |
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Keyelements of contract management |
• Contract development • Contract communication • Contractadministration • Managing contractperformance • Relationshipmanagement • Contract renewal ortermination |
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Transfer of assets |
Contract terms should clearly establish: • The value (or valuation) of assets transferred to theoutsource provider, and how depreciation or appreciation in value will be dealtwith • Arrangements for the return to the outsourcer, orother disposal, of assets transferred to the outsource provider, upontermination of contract • Arrangementsfor the return of files, data and proprietary information to the outsourcer,upon termination of contract • Ownership of assets developed or created inperformance of the contract • Responsibilities for insurance, maintenance andmanagement of the assets |
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Employment terms of transferred staff; |
Express provisions should be made for the disposal ofexisting staff providing the service: • Establishing any undertaking by the outsource providerto adopt the contracts of existing staff • Reminding both parties of their obligations under theTransfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) |
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Performancemanagement clauses |
• A rights of inspectionclause • A schedule performanceclause • Penalties for specific non-performance, and incentivesfor performance or improvements |
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Transfer ofemployment contracts |
• Thenew employers must take over the contracts of employment of all employees • Theycannot dismiss employees because of the transfer unless there is a soundeconomic, technical or organisational (ETO) reason entailing changes in theworkforce • If a dismissal on ETO grounds takes place immediatelybefore the transfer, any liability remains with the transferor • Thenew employers take over and are bound to honour all rights and obligationsarising from the employment contracts, except some provisions for old age andinvalidity, and the pre-existing debts to employees of an insolvent transferor • TheRegulations provide some freedom for either party to agree variations to contractsof employment before or after a transfer, where the sole or principal reasonfor the variation is a reason unconnected with the transfer, or a reasonconnected with the transfer which is an ‘economic, technical or organisational(ETO) reason entailing changes in the workforce’ m |
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Consultation and notification |
The Trades Union and Labour Relations (Consolidation)Act 1992 (TULCRA) places a duty upon the employer to consult with representativesof employees to be affected by redundancy. The consultation must includesuch matters as:• Reasons for theproposed redundancies • Number of employeesinvolved • Proposed methods ofselecting those to be made redundant • Timing of the dismissals • Ways of avoidingredundancy |
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Alternativesto compulsory redundancy |
• Natural waste • Retraining orrelocation and redeployment of staff • Loaning or seconding staff to other units ororganisations with labour or skill shortages • Incentives to take voluntary redundancy or earlyretirement • Revised workingarrangements |
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Contractual provisions for review and non-renewal |
Provisions for renewal of contract may include: • The initial durationof the contract • The availability ofan extension period, if any • Criteria forqualifying for extension • Procedures forterminating the contract • Procedures forhanding over to a new provider |
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Risks of contractor switching |
*Thenew supplier may fail to perform * Process incompatibility *Culturalor inter-personal incompatibility *Loss of knowledge *Learning curve: time for the new provider to achievepeak performance, teething problems *Exposure of intellectual property, confidential data *Problemsof adversarial hand-over from the old provider to the newDe-stabilisation of the workforce, throughmultiple transfers of service provision |
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Costs of contractor switching |
*Identifyingand qualifying alternative providers * Initiating and administering tenderingexercises or other sourcing and contracting processes * Settlement of work in progress projects with theoutgoing provider; settlement of outstanding claims; payment of ‘exit’ (egearly cancellation) fees *Change of internal systems and processesto align with the new provider *Familiarising and training the new provider inpolicies and requirements *Contract development and contractmanagement (often with more intensive monitoring and contact in the earlystages of the relationship) * Risk mitigation measures (eg insurances) andcorrective measures (eg re teething problems) |
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