ornethi ng is 'done for you ', but t here is no tr,rn sfer

of owner'>hir> of ;inyth ,n g ac; part of th e

~ r rv ice tra nsaction . (I t is r1 lso worth rPme mbcr lng th,1t !,Orne
form of .,,,rvi ce i:. part of t hP
~bundl e of bene fit s' y?u r1cqu lre w hen you purch
as~ mate rials and nood •,: ,. r1 le•, •;c rv,ce,
, er se rvi ce, delivery, r1fte r-sr1 les cr.1rP, warranti es
(US ton and so on .)
A wi de range of servic es dl'e offere d by provid ers:
fi nanci al se rvi ces, banking and ine,u ran cl!;
tra nsport; en terta inm ent , hos pita lit y an d cate rin
g; hai rdress in g; plum bing; educ ati on;
healthca re; an d so on. Some of the most comm on
servic es utili sed by bu sin ess organi sation s
include : ba nking, consultancy, advertising and desig
n, catering, cleani ng, security,
mai nten ance, warehousing, trans port and distri
butio n, and IT supp ort.

Distin ctive features of serv ices

~h e disti nctive features of services - as opposed
to physical produ cts - have been analyse d
primarily in the marketing litera ture. However, the
follow ing concepts also raise uniqu e
ch al lenges fo r procurement.

• Intan gibility (or in procu reme nt terms , 'lack of inspe

ctabi lity': Baily et al). A service
cann ot be measured, weighed, chemically analy
sed or other wise 'insp ected ' befor e
it is purchased, or when assessing satisfaction (or
conformance to specification) after
purch ase . The procu reme nt funct ion will have to
look for other evidence of a service's
attri butes and quality, such as promised or agree
d service levels, price, convenience, the
efficiency of processes and the quali ties of the
people who deliver the service.
• Inseparability: services are produced and consumed
at the same time. The effici ency and
effectiveness of the processes and peop le involv
ed in 'prod ucing ' (delivering) the service
are crucial to the customer's experience of it, and
will be crucial to the procu reme nt
functi on's selection and evaluation of the servic
e.
• Heterogeneity or varia bility. Goods emerging from
a manu factu ring process gene rally
have a high degree of unifo rmity, which simplifies
their evaluation. In contr ast,
every separate instance of service provision is uniqu
e, because the personnel and
circu mstances are differ ent. This makes it diffic
ult to 'standardise' service specifications
so th at customers can be sure what they will get,
or that they will get the same thing
every time .
• Perishability (or in procu reme nt terms , 'impr actic
abilit y of storage' ). A service cann ot
be stored or stockpiled for later use, so the tim ing
of supply is diffic ult to contr ol. The
procurement funct ion has to plan ahead, in colla
borat ion with suppliers, so that t he
se rvi ce is available when it is needed . (This does
not apply to all services : Baily et al cite
th e examples of cleaning services, wh ich are usua
lly not time -critical, and insu rance ,
which may be provided conti nuou sly in retur n for
an annual prem ium .)
• Owne rship (or in procu reme nt terms , 'unce rtaint ies
in cont ractual agree ment s' ).
Ser~i ces do not result in the trans fer of owne rship
of anyth ing, maki ng it diffi cult t o
define whe n a contract for services has been prope
rly f ulfille d, and when ris k an d liab ility
have passed from one party to another. (Baily et
al use the exampl e of an archi t ect
~ho submits a design whi ch meet s all the clien
s t's sta t ed criter i a - but which t he clien t
im ply doesn't ' like'. Wh o, if anyo ne, is at fa ult -
and who pays for the archi tect 's second
atte ~~t?) Buyers wil l have to defin e th eir req ui
speci fication 5 reme nts very clear ly, in detaile d service
f · I
, se rvice evel agree ment s and an agre
ra ught with difficu ltie s! ed bas is fo r charge s: an area often
The five rights (or five Rs) of procurement, and the importance of achieving them, are
summarised in Table 2.1. Don't worry if you don't understand all the points or terminology
yet: we will be discussing these matters in more detail in the rest of the chapter.

Table 2.1 The five rights of procurement

RIGHT DESCRIPTION IMPORTANCE

Quality • Obtaining goods which are of • If not achieved:
satisfactory quality and fit for their Stock may have to be rejected or scrapped
purpose (suited to internal and • Production machinery may be damaged
external customer needs), by accurate • Finished products may be defective and have
specification of requirement and to be scrapped or re-worked
quality standards • Defective products may reach customers,
• Supplier- and buyer-side quality resulting in recalls, returns, compens ati on
management claims, lost goodwill, damaged reputation
• The firm will incur high costs

Quantity • Obtaining goods in sufficient quantity • If not achieved:

to meet demand and maintain service Insufficient st ock m ay be held t o meet
levels while minimising excess stock demand . Stockou t s may cause bottlenecks or
holding (which incurs costs and risks) shutdowns in production; costs of idle time;
late delivery to cust omers; lost credib ility,
goodwill and sales
• Excess stock may be ordered and/or hel d:
tying up capit al in 'idle' st ock; wasting storage
space; risking deteriorati on, theft or da mage;
risking obsol escence or disuse; incu rring
'holding costs'

Place • Having goods delivered to the • If not achieved :

appropriate delivery point, packaged Goods may be delivered to the wrong pla ce,
and transported in such a way as creating delay and correction costs
to secure their safe arrival in good • Goods may be subject to unnecessary
condition transport and handling (and relat ed costs)
• Goods may be damaged, contaminated or
stolen in transit
• Transport may cause unnecessary
environmental damage

Time • Securing delivery of goods at the right • If not achieved :

time to meet demand, but not so early Goods may be too lat e, causing produ ction
as to incur unnecessary inventory bottlen ecks (and associate d costs) and/ or
costs delays in delivery t o custome rs (with cost~ of
damages, lost business)
• Good s may be too early, causi ng undue risk~
an d costs of holding inventory

Price • Securing all of the above at a price • If not achi eved :

which is reasonable, fair, competitive Suppliers will be fre e to charge wh at they
and affordabl e. Ideally, minimisin g li ke, without ch eck
procurem ent co sts in order to • Su ppli er profit margin s will be 'squeezed'
maximi se profit unfa irl y, lea ding t o insecurity of supply
• Materials and supply costs will rise
• Profits wil l fa ll - or pri ces charged to
customers will have to ri se (losi ng sales)
• There will be less profit to motivate
shareholders and rei nvest in th e business
 ,, ,'.I

s ways.
t has been define d in variou
Supply chain managemen h suppli ers anct
ups tre am an d do wnstrea m relationships wit
'The manage me nt of chain as a who le'
•
r sup eri or cus tom er va lue at less cost to t he supply
custome rs to delive
{Christ op he r) ivitie ~ th rough
ma n age me nt of sup ply cha in organi sat ion s and act
• 'The integration and processes, a~d high level s
an isa tion al rela tio nships, effecti ve bu siness
co- opera tive org h~t provide member
sha rin g t o cre at e hig h-p erforming val ue syst em s t
of inf orm ati on field & Nicho ls)
ns a sus tai na ble com petitive advantage ' (Hand th
orga nis atio
gra ted bus ine ss pro ces ses acro ~s e supply
ons and inte
• 'The ma nagem ent of re lati supply chain _p~an and
SC M con cep t entails tha t the links in the
ch ai n... Use of t he rall efficien cy_ and
he ir pro ces ses and rel atio nsh ips by weighing the ove
co- ord inate t Skj¢tt-Larsen, Supply Chain
pe titi ve po we r of t he supply chain '. (Jespersen &
com
Practice)
Manageme nt in Theory & be tw een the
plie r ma na ge me nt loo ks mainly at the rel ati on sh ip
th
In ot her words, where sup s on ~ proces ses
me dia te sup plie rs, and pro cu rem en t focuse
buying fi rm an d its ow n im in manage ment
ser vice s fro m an im me dia te supplier, su pp ly cha
requi red to ob ta in go od s and th at make up the
era ctio ns and link age s be tween all the organisations
looks at all th e int
supply chai n. .su pp ly c~ain, so
of bu ildi ng col lab ora tive relationships across the
SCM consis t s pri ma rily pro fita ble way.
tog eth er to add val ue for the end cu sto me r ma
tha t the wh ole cha in works se days :
tics an d Su ppl y Ch ain Ma na ge me nt) argues tha t, the
Christ op her (Logis ee n t hei r
is no t be twe en ind ivid ual companies, bu t be tw
gle
'The real competitive strug iq ue is the way the
two rks ... Wh at ma kes a supply chain or ne tw ork un
supply chains or ne ge d. In t his sense , a major
rfa ces in the chain or ne two rk are ma na
relationsh ips an d inte on e b us iness enj oys,
tio n com es fro m the qu alit y of relationships tha t
source of dif fer en tia
rs.'
compared to its competito m an agement
er key foc us of SC M . It imp lies the plan nin g an d
'Business processes' is an oth ov in g an d sell ing') that
of act ivit y (wh at Em me tt calls 'buying, ma kin g, m
of whole sequences : examples
inf orm ati on fro m ori gin al su pp lie rs t o en d users
and
provide products, services ply, dis trib uti on an d pro du
ct deve lopment.
g, cus tom er ser vic e, sup
include ord er processin an isa ti on a l boundaries .
en tial ly ho rizo nta l, cut tin g across fun cti on al an d org
Processes are ess
oss fun cti on al lines and
tur e is the ref ore 'int eg rat ion ': co -or din ati on acr
The th ird key fea on may be
Jes per sen and Sk j0tt -La rsen no te tha t co -or din ati
organ!sa~onal boundaries. ate d (eg integrated
org an isa tion al tea ms an d int erf ac es ); sys tem s rel
~rganisa~onal (eg cross- inv en tor y status sales
s); or pla nn ing rel ate d (eg exchange of da ta on '
inf orm ati on system
ctio n pla ns) .
forecasts or pro du
nage me nt
4.3 Drivers for supp ly chain ma
Suppl y Ch • M sts a nu mb er of oth e r pre
ssure1
Andrea Reynolds (Strategicvironm t a,nh. hanagem,en_t) sugge
in the modern business en for SCM
en 'w ic ac t as dri ve rs'
.
ssu res (th e nee d to red uce inv en tor y an d oth
• c_ost pre . er wa ste s)
for faster
• Time pressures (the need rie s)
pressu res (th en d 'm or e cu sto mi se d de live .
liab ility s to
• Re
. ee to ensure tha t q ua 1·t I Y an d de liv e ry co m mi t ment
. y de ma nd ing t
in creasingl cus omers can be me t)
• R ed t 0 .
esponse pre ssures (t he ne pro vid e real -ti me ·in f orm ati on to inc rea s ing ly
dem and'ing cu stom ers)
 • Trans~are) ncy pressures (the need to make the status of orders vis ible t o support
planning ,
• Gl obali satio n pressu re (th e need t d' ·
o co-or inate multiple, complex global supp ly networks)

4.4 Potential benefits of an SCM approach

Th e benefi ts of an SCM approach incl ude th e fo llowing.

• Reduced co st s, by elimi nati ng wa ste activities and implementing cost reduction

program mes_through~ut t he supply chain . ('Often th ere are ma ny activities t hat do not
create va~u: _involved in trade bet ween two com pa nies. Jointly locating an d eliminating
t hese acti vities, as well as developing co-operative goals and guideli nes fo r t he futu re,
ca n focus resources on real improvements an d development possibiliti es' : Jespersen &
Skj!:btt-Larsen)
• Improved responsiveness to customers' requirements (by emphasising th e continuous
flow of value towards the customer) - hopefully resulting in greater customer loyalty and
sales revenue
• Access to complementary resources and capabilities (eg joint investment in research and
development, technology-sharing, ideas-sharing and so on)
• Enhanced product and service quality (eg through collaborative quality management,
continuous improvement programmes and enhanced supplier motivation and
commitment)
• Improving supply chain communication (through increased information sharing and
integration of systems), which in turn offers benefits for more efficient planning and co-
ordination, reduced inventory, and potential for innovation and flexibility.
• Sharing demand forecasting and planning information enables suppliers to produce only
what is required, when it is required, reducing inventory- an approach which you may
recognise as just in time supply.
• Faster lead times for product development and delivery also mean that new and
modified products can be offered in response to changing customer demand - an
approach which is sometimes named 'agile' supply.
• Better communication allows greater transparency. Information on costings,
performance, and the status of individual order~ and stoc~ movements is available
quickly or in real time: building trust, and enabling all parties to plan ahead and to
manage contingencies as they emerge.
However, •1t •1s 1mpo
• rt an t to be realistic about the benefits claimed for SCM - and to analyse
. . . .
w het h er a ra d .1ca 1, st ra t eg1·c SCM approach is relevant, possible or beneficial for a particular
organisation. It is not for everyone!
. cons1'd era bl e ·nvestment
• It requires 1 , internal support and supplier/client willingness - any
or all of which may be absent. . .
. f • closer relationships with a smaller number of..suppliers
• It also involves ocusmg on . . , k f I
and clients and this may be risky: if the relation~h1ps don t war bol ut, or exbamp e - or
' d d nt on a supplier which later has pro ems, or ecomes
if the firm becomes epen e what the firm needs.
complacent, or no longer pra d uces . .
. . h . may expose the firm to loss of control over commercial ,
• Network mformation-s anng d d' tinctive competencies, opening it to imitation
. f . I . t llectual assets an is
in ormation~: in e from within the extended network) .
and competition (perhaps even . . .
. f ·rly distributing the gains and risks of co-operation among
• Th ere may be problems in ai
supply cha in partners .
 i s and
d refu l int e rn al ana lys
i ng on supp ly cha ·
m pa ny ne e s ~a ti 0 n in fo c us
at a co de t hem in
tt-Lars en suggest th a cesses an d ma
Jespersen and Skj9> ve, cla rif yin g its mo v
ti, '
it is seeking to achie• · · ter na prclo o
sel y w ith ot h er su
pp ly chain
discussion of wh at . ted its ow n in mo re
has no t fir st co -o rd
ina vantages of
efficiency. If a fir m co -o pe ra t e d th e po t en tia l ad
ed to
rally no t be prepar
efficient, it wi ll gene areas fo r im prove me nt - an
no r to de fin e cle ar approach
participants , d' 1str ate gi c SCM ,
. m pu rsu es a ra ,ca l se ns e) w ill still
cru e fi ne ra
SCM wi ll no t ac chain (i n a m or e ge
ho we ve r, th at wh et he r or no t a r I
Please note, supp Y
manageme nt of the
supplie r management and
be required! .
t
ve lo p ing su pp ly ch ain managemen . lat io ns hips across
t he su pp ly chain,
4.5 De . .
e, int egrati ve re
ar ily of collaborativ
SCM consists pr im ng or th e shar ing
of
y take the fo rm of : • · t de ma nd fo re casti
which ma ge (eg Join
inform ation exchan
• Product and process n ge m en ts)
. k d · st in tim e ar ra . .
costing inf or ma tio n) em ent lin s an (eg th ro ug h tr us t-b ui ld in g and
JU
s (eg e- pr oc ur
• Operational linkage ti
s
e de fin itio n of no rms and expecta an
• Co-operativ s); and
gic planning exercise es tm en ts ).
collaborative strate (eg joi nt projects and inv
ad ap tat ion s
• Relationship-specific
ag em en t
g proc urem en t and supp ly chain m an
4.6 Comparin (o r SCM) en t' an d
n 'su pp ly chain ma nage m a
distincti on be tw ee is ju st on e lin k in
The essence of the
d on rec og nis ing th at an or ga nis at ion va lue
at SCM is base inc re as e
'procurement' is th e ob je ct ive is to
cu sto me rs. Alo ng the whole chain th en tra te on ly on the
d if bu ye rs co nc
chain of suppliers an done mo st ef fe cti ve ly
n the
bu t this will no t be la tio ns hi p betwee
and reduce waste, , or on the dy ad ic (o ne -to -o ne ) re
ppen to work for cti ve .
organisation they ha op t a wi de r pe rs pe
tie r su pp lier: they need to ad l
buyer an d a fir st- ee n th e 'tr ad itio na
) su mm ar ise s th e dif fe re nc e be tw
ain in 90 Minutes cip lin es ) d
an
Emmett {Supply Ch al pu rch as ing an d pr oc ur em en t dis
ion
equated wi th tra dit : se e Ta ble 3. 2 .
wa yr (which ~a y b.e ly ch ain ma na ge me nt th in kin g)
h embody su pp
the new ways (whic
ws of SCM
Table 3.2 Traditional vs new vie

ion
Key feature : Independe
nce Key feature : Integrat
link
Indepe ndent of nex t Dependency

Links are protective End -to -end vis ibility

Uncertain ty More certainty
Unrespo nsive to change
Quicker response
Hrgh cost, low service cost
High service, lower
Fragmen ted internally
'Jo ined up' structures
lture
'Bla me' (adversarial) cu
'Gai n' (coll ab or ati.ve value -adding) cu lture
s
Co mp eting com panie
ains
Competing supply ch
 . om e of the ma in stakeh olders in
and influence o f s
Let 's briefly surv~Y. t_he int~r;;~;orm
ance.
procurement act1v1t1es an

~ )le 1kel 1d dU l'S . ·nc rit or supply cr18 in tuncticA·1

ur· ~] p i'OC l Jt C➔ I 1
'-

2.1 Internal stakeholders of procurem

ent
such as managers and em plo yee
Internal stakeholders include genera s (and/or
l groubps ·n not -for -pr ofit org ani
sat ion s) . Fo r example
volunteer wor kers or Othe r types of mem ers, 1
k t itse lf to sen ior ma nag em ent or ,
the procuremen t function may hav .
e to ma r e manageme nt
have to communicate changes in . roc ure me nt pol icy and pro ced
teams, or may p ure s to all
. Ch pte r 2 the inte rna l sup ply
staff. More specifically, as we saw cha in and cross-functio nal
activity in the organisation mean tha in a , . d tme nts are key inte rna l
t oth er fun ctio nal epa r
stakeholders in procurement activity
and performance.
Internal stakeholders for a given pro
curement decision or exercise ma th
y ere fore include the
following.
• The own er or sponsor of a pro
ject or activity, wh o puts aut hor ity
and resources behind it,
initiates it, and sets its objectives
• Customers and users of the activity
or its out put s: dep artm ent s wh o
advice or assistance, or end users rec eiv e procurement
of the procured resources and ser
• Participating staff, who may be dra vice s
wn from the pro cur em ent tea m
functions, whe the r through cross-f or fro m oth er
unctional wor kin g and info rma tion
dedicated cross-functional project flow , or in
teams (depending on the act ivit y
and its organisation) .
The interests and influence of som
e key internal stakeholder groups
4.1. are sum ma rise d in Table

Table 4.1 Internal stakeholders

STAKEHOLDER INTERESTS/NEEDS/DRIVERS
INF LUE NC E/C ON TRI BU TIO N
Directors/ • The organisation's profitability,
managers survival and growth • Formal auth orit y ove r plan ning
• Fulfilment of objectives and proj • Shape the com mitm ent and
ects
for which they are responsible mot ivat ion of staf f
(requiring purchasing inputs and /or • lnflu_ence thro ugh politics, netw orki
ng
support) and influ enc ing skills

Staff/team • The organisation's prof itab ility and

members or other survival, for continued employment •
Scar
. ce resource·· com petiti. ve edge .
organisation times or areas of sk ill sho rtage ,n
• Support, information and inpu
ts to • Th reat of with d rawn labo u r
members fulfi l task goals and earn rewards
• Healthy and safe working • Pot~ nti al to add value thro ugh
skill ed,
environmen t motivated perfo rmance fle "b•i·
. . , xi 1 1ty etc
(esp ecially 1n serv ices)
• Fai r and ethical t rea tme nt

Technical/design • Accurate fulfi lm ent of specificatio

ns • Determ ine sp ecifi catio n s an d
function • Timely, rele vant, expert advice on
materials whi ch t he buy er will h
price and availability issu es .
translat e into purch ase ord ers ave to
• Conn ection to suppl iers who might
con trib ute innovati on and exp ertis
e
 H4ii·&1,ttfai4 --=:;uwn+i4id0Uit•b') ·D
iid:liil•U:f-4,idiil " Right inpu ts at righ t pri ce ,md
rig ht • Key inte rna l cu ,,tom N pur cha
sing
ilme nt
Man ufac ture /
ight pl,1ce at pr·r form anc P m ea, u red by fulf
pro duc tion / ~ud llt~, d<'liver(•rl to,
118 ht tin ie to ni ulnt .i ln cffi w•n l fl ow o f of 'five righ t s'
of
ope ratio ns • Provision of feed bac k on qua lity
func tion Prod uctt on aid sup pli er and con trac t
in put s to
• Sup p lier man age me nt and SCM
man age men t
to sup por t nex lbill ty, JIT sup ply,
in nov atio n etr.
i ces
• Sou rci ng and pro cur eme nt serv
(eg for ca pita l equ ipm ent ) or
co nsu ltan cy
and
ve ry • Pro vision of m arke t resea rch
• Qua lity, cus tom isat ion and deli n to
Sales and tom ers cust ome r fee dba ck in fo rm atio
levels tha t will satisfy cus ns and
marketing influ enc e pro duc t specifi cati o
• Fulf il me nt of prom ises mad e to
fun ctio n qua lity man age me nt
cus tom ers ; responsiveness to via
• Promises m ad e to cu stom ers
feed bac k and dem and s tion s, whi ch
very mar keti ng com mun ica
• Info rma tion on pro duc ts and deli t o
pur cha sing mu st con trib ute
sch edu les for pro mot ions
ices deli veri ng
• Sou rcin g and pro cur eme nt serv
ices , offic e sup plie s,
(eg prin ting serv
con sult anc y (eg for
sales forc e cars) or
or age ncy
own med ia space buy ing
sele ctio n)
ure s • Con trol or influ enc e bud get
Finance/ adm in • Adh ere nce to fina ncia l pro ced
trol , invo icin g allo cati ons
(eg bud get ary con
function • Act ion pay me nt of sup plie rs
arra nge men ts) nsh ips
w ith • Ma y imp act on sup pli er rela tio
• Not ifica tion of term s neg otia ted late or
t (eg if pay men t for sup plie s is
sup plie rs (eg disc oun ts, paymen
with held )
term s) of cos t
• May be lead ers or cha mp ions
• Sup por t for cos t con trol and /or v es
con trol and red ucti on initi ati
red ucti on
• Pro visi on of info for bud geta ry
etc
con trol , cos ting , cre dit con trol
cur eme nt serv ices
• Sou rcin g and pro
stat ione ry) or
(eg for IT systems and
con sult anc y
o w of
• Con trol or influ enc e tim ely fl
• Tim ely info abo ut inco min g and del iver ies
Storage and and inco min g and out goi ng
out goin g ord ers, for tran spo rt and
distribution (or • Infl uen ce on was tage , dam age
logistics) - if not stor age plan ning sup plie s (eg thro ug h
ning , obs oles cen ce of
part of purchasing • Policies for 'gre en' tran spo rt plan t tran spo rt and
safe, sec ure , effic ien
and supply safe goo ds han dlin g etc.
ices stor age )
function • Sou rcin g and pro cur em ent serv
anc y
(eg for equ ipm ent ) or con sult

2-2 Conn ec ted sta ke ho lde rs

virt ue of
ofte n hav e a sig nifi can t stake in org ani sat ion al act ivit y, by
Con nected stakeholders inte rests
com me rcia l rela tion shi ps wit h the org ani sation. Some of the
their contractual or
sum ma ris ed in Table 4.2.
and influence of these groups are

\
 l
Tab le 4.2 Con nec ted ~ta ke/ wid er~
S INFLUENCE/CONTRIBUTION
STAKEHOLDER INTERESTS/NEEDS/DRIVER
rm s
d~ • Ow nerc, and hnanci ers ot fi
Sharehold ers • Ret urn on inveslm i>nt , divi den • Voti ng pow er at com p any me etin gs
e• : tra nspare ncy,
• Corporate govern anc • Pow er to ~ell shares (inn u enc ing
c tor~ pro tec tin g ncial
.1ccountablllty, dire share pric e, per cep tion s of fina
t hei r lnterPs ts
ma rke ts)

roc u s o f all b~1,ine ·,'· act ivity

dl e
End customers • Satisfaction of a complex bun • Sour ce of sales reve nu e and
pro fits
s for
of expectation s and mo tive • Sou rce of feedba ck info rma tion (11 a
ey, quali ty,
purchase (eg valu e for mo n surve y~, compl ain ts etc)
) - NB di ffer ent tor custom
service experience • Pow er to sw itch or w1t hd rav.,
business or in du stria l
consumer and
buyers. ute
• Help to pro mo te and dist rib
practices and
Inte rme dia ry • Ethical, efficient trading pro ducts
'va lu e delive ry
customers systems • Part of tota l custom er
, reliabl e itiv e adv an ta ge
(eg agents, • Sales support: pro duc t info system' for com pet
sup por t, sales ora tive pro m otio n
distributors, retail supply, pro mo tion al • Potent ial for col lab
info on sa les .
outlets) force training • Source of fee dback
through
• Earnings and profits (eg cus tom e rs et c
, fees or trib uti on or
discount mar gins • Pow er to w ithh old dis
commissions) pro m otio n, or to ai d com pet itors (eg
• Mu tua lly beneficial ong
oing dis trib utio n dea ls)
wit h exclusi ve
rela tion ship
inp uts (at
• Provision of pot ent iall y key
er dispute s)
Suppliers • Clear specifications (few req ui red qua lity, price, tim
e)
rela tionship
• Efficient transaction and • Pow er to wit hho ld or r est rict suppl,
handling • Expertise (eg fo r pro d uct
rdin g
• Fair procedure s for awa dev elo pm ent and specifi cat
ion)
contracts ed v alu e (eg vi a
• Pot ent ial fo r add
• Timely payment of debts JIT, lea n sup ply, co llab o rati ve w aste
ab le pro fit
• Op por tun iti es for reason red uct ion , con ti nu o us imp rov t:m en: ·
taking
ment
• Op por tun iti es for develop
trad ing , alli ance or
thro ugh regular
partnersh ip
t service
• Feedback info to sup por
lea n
Financial stre ngth and sta bilit
y of th e • Sho rt-t erm and lon g-te rm
Financial • and de, ~lcp
urit y of the loa n) fina nce to ma inta in
ins titu tion s/ company (for sec
(eg vi a inte res t) ope rati ons
lenders • Return on investm ent
teg insurJ ,,2
• Mu tually ben eficial on goi ng • Add ed val ue ser vi ces
rel atio nship cur ren cy ma nag em ent )
i t hdr 3\\ : r<'.:: :
• Pow er to res tri ct or w
fac iliti es

r
2 -3 The su pp lie r as sta ke ho lde .
pro cur em en t 's t . iv ity is li k~ I, to b:>.
Th e main external foc us of 5
ake ho ld er mana ge m en t act
. h ,:'.
• Et e a key sta ke i t he :-u- ·
1
x ern a supplie rs, wh o hav cure m en t exe rc ise an d Me
res .b.l n any pro '
of purcha se rs ' key social .
pon s1 1 iti es (Lyson s & Fam ng ton )
t
• Ext ern al co llaborator s, sue , as ou t sourced-servic e pro v .ide rs (proj ec t ni Jn ,1gr1 nw 11t
I . . sul t· t .
ogist:ics etc), research con an s, 1ega l adv i se rs and so on .
Tab le 4. 3 Ex ter nal sta keh olders

t<.
Cor por ate tax re ven ue • Pow er to enforce requiremen
Go ver nm ent and •
ion, reg ula tion ,
act ivit y thro ugh legi slat
reg ula tory bod ies • Hea lthy lev el of eco nom i c
and pen alti es
• Com plia n ce wit h legi slat ion pub lic
reg ula tion • Con tro l ove r tax levels and
fun din g (eg vi a grants)
• Rep orts and retu rns e cu st 0 me r
dev elo pm ent • Bargaining pow er as a larg
• Sup por t for com mu nity or sup pli er of good s or se rvic
es
and em plo ym ent • Sup por t and guidance for
bus ine sc,

lo bby ing )
ren ess • Ma y shape po licy (eg via
Pressure groups • Pro mo tion and increased awa • Info rm and mo bilise pub
lic and
trad e,
(eg Gre enpeace) of a cause or issue (eg fai r con sum e r opi ni on fo r or aga inst the
env iron me nt) .
and inte rest org ani sat ion
inte res ts of imp acts
groups (eg • Pro tec tion of righ ts and • Sou rce of info re issues and
anc e eth ical
consumer me mb ers • Ma y coll ab ora te to enh
nd
associations, • Access to info rma tion and cre den tial s of the firm or bra
ts or
tra de unions) acc oun tab ility • Pow er to mo bili se pro tes
n fun din g
• Spo nso rsh ip or don atio boy cot ts
i al
• Pool of cur ren t and pot ent
services, rs and em plo yee s
Co mm uni ty and • Access to pro duc ts and cus tom ers , sup plie
nt policy
society at large em plo ym ent • Pow er t o mo bili se gov ern me
• Pro duc t safety and con sum er opi nio n
goods and
• Affo rda bili ty of essential
services
iness and
• Socially responsible bus
env iron me nta l pra ctic es : harm
min imi sat ion

il ity
3 Co rp or at e so cia l resp onsib
po ns ibi lity ?
3.1 W hat is co rp or ate so cia l res
, for exa mp le thr ou gh
act ivit y can hav e a neg ativ e effect on local com mu nit ies
Business t of small businesses,
dam age , tra ffic congestion, the squeezing ou
en viro nm en tal o imp ose financial
t as a res ult of dow nsi zin g and so on . These imp act s als
un em plo ym en pay for {and wh ich are
, wh ich the bus ine ss itse lf does no t acc ou nt or
costs on soc iety d tha t business has
es cal led 'ex ter nal itie s'). It has the ref ore been arg ue
the ref ore sometim back' to the communities
ility to min imi se the se imp acts and to 'give som eth ing
a responsib and cus tom ers .
sup po rt the m - and pro vid e the m wit h resources, sta ff
tha t corporatio ns to
ate soc ial res pon sib ility {CS R) emphasises the ne ed for
The concept of corpor are imp ort an t issues
t the inte res ts of sec ond ary sta keh old er groups. Th ere
take into acc oun h its var ious
as it for mu late s pol icie s ab ou t ho w it can int era ct wit
which face an organisation y.
ponsible and sustainable wa
stake holders in an ethical, res
d up CSR as foll ow s.
One CIPS examiner has summe
me nta l, social an_~
mit me nt to sys tem atic con sid era tion of the en vir on
'CSR means the com tain abd1t~,
sat ion 's ope rat ion s. Thi s inc lud es the key issues of sus
cultura l aspect s of an organi sup plie r and cu sto me r rela
tions be:°1'1
co_ m m~ nit y rel atio ns, and
human r!ght_s, lab ou r an~ d contribute t
The obJ ect ive [ 1
s] to cre ate lon g-t erm business val ue an
!egal o~ ligation s. tio ns .'
e soc ial con diti ons of the people aff ect ed by ou r op era
im provin g th
 , f l1 1 cldrtfi cation
, Tl)ch,,l lenge over-speci ficati
o n or unn
, rosu.ggest
..
alternatives that .
d
ecessary variatio
w, 1I offer b n, or
n"qu 1s1t1 one . etter quality or 1 .
. . ower price t han t he item
n,is •1s ·~1 ~ey
·
pote nti al source of ad d
t • ed valu e i
th
to rn 1n11111se w as e In the form of n e procurem t .
,,nd associat ed un necessary co t unn ecessary vari ation, featuernes,proce.ss, since it is design ed
s s. quali t y or servi ce levels -

4t th is stage , th e CIPS procurem en t cycle di

other words, do we produce the req u1rement. scusses d ..
· h the need for a make/buy ec1s1on - 1n
.
Clea rly f?r the va st majority of procurement s in_- ?use or do we seek an external supplier?
to question w hether a particular req . th,s is clear cut. However there may be a need
Modern thi nking suggests that if ·1t . u1rhemen~ forms part of the organi~ation 's core activi ti'
is, t e choice ·11 es.
if it is not w e should probably find . WI usually be to produ ce in-house wherea s
a suitable external supplier. ,

. procurement model
3.3 Defining the need : Stage 2 in our genenc
he process . and d
. . so far relates to the i' d en ti'fi cation · · . .
· organisation. The next step will bet b. escnption of the need w1thm the buying
• 0 esta llsh a detailed d · ti f h •
whi ch can be communicat ed to P t ti . . escnp on o t e requirement
1
the purchas e is a re-buy, for examo 1:n) a suppliers. Detailed descriptions may already exist (if
up, in the form of: p , but for new procurements, they may have to be drawn

• Specification s (of various types)

• Service level agreements (added to the specification of services)
• Co~tract terms which set out the obligations of buyer and seller in relation to the
fulfilment of the specification .
The CIP~ procuremen t cycle also suggests a consideration (at this early stage) of what types
of suppliers to look for (local, national or global), and also whether to use an invitation to
tender or a request for quotation. We look at these aspects in the next chapter.

3.4 Specificati ons

A specification can be simply defined as a statement of the requirements to be satisfied in the
supply of a product or service.
-:J.._As P~~t o~ the procuremen t model, the purpose and value addition of an effective
fS pec1fication is to:
• Define the requiremen t- encouraging all relevant stakeholders (including the procurers
and users of the supplied items) to consider what they really need, and whether this is
the only, most cost-effective or most value-adding solution
• Communicate the requirement clearly to suppliers, so that they can plan to conform -
and perhaps also use their expertise to come up with innovative or lower-cost solutio ns
to the requirement
• Minimise risk and cost associated with doubt, ambiguity, misunderstanding or dispute as
to req uirement, and what constitutes satisfactory quality and fitn ess for purpose
• Provide a means of evaluating the quality or conformance of the good s or services
supplied, for acceptance (if conforming to specific~~o~) or ~ejection (if non-conform ing),
to ens ure that 'right qua lity' is achieved, and to min1m1se failure costs
• Support standardisation and consistency, wh ere ite ms are procu red from more than one
source .
 I ,
I' ' , I/
, I '

'fication s are as follows .

. t ntia l downsides of using spec1 . suming process , and almost certa in\,
The main po e ·ve and tim e-con
, . s ecification is an expens1 I
• Detailed
uneconomic
~ for small -value purchases. ter than if a simple r form of need
. d uality control are grea
• The costs of inspect10n an q . d .
d fi 'tion (eg by brand name) is use · d d· they need to be regular ly reviewed,
e ni ti ly embed e . h
S ecifications can become too rm. . d the latest develo pments in t e supply
• P th
to ensure at the latest .design dec1s1on
t
s, an
market are being taken into accoun . ecify increas ing cost (withou t
• Specific' ations can create a t em ptation to over-sp ,

necessarily adding value). 'fi ation and perform ance (or

'fi tion· conform ance spec1 c
There are two main types Of speci ca · .ft tion the buyer details exactly what
'fi ti w·th
1 a conformance spec1 ca ,
functional) spec1 ca on. .t The supplie r may not know in detail,
the required product, part or material mus~llcon, st~ ~he1 buyer's manufa cturing . It is its task
or even at all, what function the product w1 Pay in
simply to conform to the description provided by the buyer.
A conformance specification may take any of the followin g forms.
• An engineering drawing, design or blueprint (technical or design specifi~ ation):
~ommonly
used in engineering and construction or architec ture environ ments, which require
~
high degree of technical accuracy and very low toleranc es (becaus e of the comple
xity of
assembly and machine function)
• A chemical formula or 'recipe' of ingredients and materia ls (compo sition specifica
tio~)_:
commonly used where particular physical propert ies (eg strengt h, flexibil ity or
durability)
are importa nt for safety or performance (eg the metal used in car manufa cture)
or where
materials are restricted by law, regulation or codes of practice , for health, safety
or
environmental reasons (eg the use of lead in paint)
• The specification of a brand name and model name or number , if a market ed
produc t
meets the buyer's criteria. Branded products tend to be of good quality and easy
to
source, if available. Purchasing by brand may be essential if a particu lar part or
materia l is
patented or prestigious (eg Intel microprocessors for comput ers).
• A sample of the product, with a require ment for the supplie r simply to duplica
te the
features and performance of the sample. This is a quick and easy method of specify
ing
require ment without having to describe it, and offers some assurance (eg the ability
to
test the sample for suitability, prior to procurement)
• The specification of compliance with a recognised standar d (eg British Standa
rds, m arket
grades, or Internat ional Standards): offering certified quality assurance and un ifo
(standardisation) . rmity

A performance (or function~!) sp~cification is a relatively brief docume nt (compa

red to a
conformance specification), in which the b~yer _describe s what it expects a part
or materi al
t o be able to achieve, in t erm s of the function s it will perform , th e level of perfo
rmance it
should reach, and any relevant input paramet ers and operatin g conditio n s. It is
up t o the
supplier to furni sh a product which will sa~sfy these requirem ents. The specification
defines
the fu ncti on alit y or perform ance to be achi eved - bu t does not (u nlike a conform
ance
specifi cation ) prescrib e how t hey are t o be ach ieved (in t erms of materials, designs
or
proce sse s).
/\ typica l perfo rman ce spec·Ifi catio .
• n mi h .
onalit y perfo g t incl ude the follow·rng deta,ls .
• Th e f uncti ' rmance or
ca pabilities to be a h' . ·
• Key process input s which .11
,e~ed, w'.thi n specified tolerances
(elect ricity, so lar powe r aw, cont ribut e to performa c
nd so on ) nee, including available uti lities
• The opera ting envir on
ment and co d' . .
(and extre me or unusua l c . . n iti on s in which t he
• How t he produ ct. . ond1tions in wh ich it is n t perfor m ance ,s to be achieved
is requi red to inte f o expec ted)
• Requi red quali ty levels (includin r r ace with other elem ents of t he proce ss
• Requi red safety levels and g elevant standa rds)
cont rols (includ ·
• Requi red envir onme ntal perf rng relevant standards)
orman ce leve ls and .
. . controls (including relevant st andards)
• Cntena and meth ods to be u d
. d se to measur e w h et her the desired function has been
ac h ,eve .

There are a numb er of advantage s t O performance s 'fi ·

'fi ·
spec, cati ons, which have made th . pee, cation over conformance
em increa singly popular.
• Perfo rman ce speci ficatio n s are .
nd
presc ripti ve (conf orma nce) a pproa easi ehr a cheaper to draft, compared to a more detailed '
c
• The efficacy of the specification d ·
buyer (unlike confo rm an . _oes_ not depe nd on the technical knowledge of the
well know better than the buyer
what is requi red and h ce_ specifications). Suppliers may
' ow ,t can best be manufactured
t heir full ex per ti se, tee h nolog,.es and ·innovative capacity to develop
• Supp . liers can use
um,) 1owes t-cost soluti ons (wh ereas con f ormance specif . . s are prescriptive and
. ication
.opflti m'bl
in ex, e .
supplier: if the part supplied does
• A great er sh~re of sp~cification risk is borne by the
(whereas with a conformance
not perfo rm its funct ion, the buyer is entitled to redress
onal it~ of the finished result).
specification, the speci fier bears responsibility for the functi
rmance specification. If the task is
• Th e poten tial suppl y base is wider than with a confo
ular function, the expertise of
to suppl y some thing - anyth ing - that will perform a partic
of solutions.
differ ent suppl iers could poten tially provide a wide range
s in the following circumstances.
It is partic ularly appro priate to use performance specification
technical and manufacturing expertise than the buyer -
• Suppliers have great er relevaisntbeing used and leveraged. It should also be noted that the
so that the best know ledge
puts pressure on effective
buyer will be highly relian t on the supplier's expertise: this
supplier selec tion and evaluation.
so that the buyer is not in
Technology is changing rapidly in the supplying indus try-
• gets the best out of suppliers'
a positi on of speci fying yesterday's methodologies, but
innov ation capacity and technological development.
ns put forward by suppliers
There are clear criter ia for evaluating alternative solutio
• . f th contr act These should be clearly comm unicated to potential suppli. ers,
. .
compe ti ng or t e 'derab·le n·me and resources in coming up with proposals, and w,11
• . .
w ho may inves cons,
want to be assured that the select ion process ,s fair.
· t time and expertise to assess the potential functionality of
( • ·f h 1· · ·
• The b•uyer has su c,en d mpeti ng alternatives partlcu ar y, t supp ,er 1s using
ffi 1 1 e
. . process
. sa h.
suppliers' propo h thco buyer is unfamiliar). The complexity of the evaluation
1s an

tech nolog. y with w ,ct e .. .

. . d of the performance specification approach .
1s t he maJor d1sa van age
 . f fund s. We therefo re explore i~(,u 1
misuse O . C\ ~u L
. ern ent, frau ord tures of accoun tability and re pornn . C11
to th e risk of rn ,s.rnilnag . rocu rement ; stru c . g, ilnc1
f ethical co des ,n P d ·s manage me nt.
. .
as t he use o t fraud an m 1
. I contro ls to preven . ·t y ,·s provi d ed b y co rporate po l1c1es and
,nterna ent ac1w 1 . .
amewo rk for procure m f m orga nisatio n to o rga nisatio n, we exp lort: ,
Anot her key fr .1 I to vary ro .
1 d d · ,1
Whi le t hese are 1 1 <e Y h tare t ypica lly ,nc u e ,n procure ment.
. and matters t a c1nu
proce dures.
ra nge of policy cons iderat10ns,
supply procedures. . t of procure m ent b y con siderin g th e fun chon\
nisa tion al contex
Fin ally we look at t he orga . I tes to oth er fun ction s.
, . d how 1t re a
rol e in th e valu e ch ain, an

11
l ,or pum1c qovnrmric:n ol pro(;IJrornrn

'?
1.1 What is 'corpo rate governanc e ·
b di t the rules policies, processes and
The term 'corpora te governa nce' refers _roa_ y o ' control led and regulated to
organisational structures by which organisations are operate d, . d .'
1 1
regu ~~on.
ensure that they adhere to accepted ethical standards, good pr~ctice s, aw an
nd controll ed in the
It has been defined as 'the system by which organisations are directe d a
light of business ethics and responsibility to stakeholders.
Governance principles, structures and processes may be defined by the shareho
lders or
wh ich a
constitution of the organisation (as, for example, in the Articles of Associa tion by
business is incorporated) or by the managers of the organis ation (as, for exampl
e, in the
).
policies, procedures and codes of conduct developed for various aspects of activity
regulation;
They may also be defined by external forces such as governm ent policy, law and
framew orks;
professional bodies (such as CIPS) which develop ethical codes and best practice
ds
national or international standard-setting bodies (such as the Interna tional Standar
Eth ical
Organization); or membership of voluntary associations and initiativ es (such as the
Trading Initiative or International Labour Organization).
sector
In a more specific sense, 'corporate governance' refers to the system by which private
lders.
organisations are directed and controlled in order to protect the interest s of shareho
s, with high
Corporate governance issues first came to public attentio n in the 197Os and 198O
and collapses. In particular, concern s were e d b .
profile corporate scandals
. xpresse y investors
. .
about the power of directors, and the transparency and truthfuln ess of fi nanc1al repo rti ng.

1.2 Wh y is procurement governance import ant?

d. .
'\;/Governan ce mechanisms such as internal controls, checks and balan ces n
1' defi ned accountabilities are importa nt in any situation of steward ship ' ~u it reviews a ci
Howeve r,
it may be argued th at procurement staff are more expose d to t emptat i:~ t~rauSt
professio nals. n mos t

• They potentia lly contro l large sums of orga nisatio nal fund s.
• They are faced by man y opportu n ities to comm it fin ancial fraud or tom .
information for persona l ga in. rs use system s or

• Their deci sions typica lly benefit some suppliers over others - creating an in ce .
for.
suppliers to try and influence those decision s. Mean wh il e, it can be difficul t t Onn ve
determi ne
wholly obj ec tive criteri a for deciding betwee n rival su ppli ers, allowing bias O
r unfai rn es s
to enter th e proces s.
 : ..... ~-. J s~ ~e a---g_ eo ~ .... a! t s oa ~ cJ .a~, -·---- - . . . . .,. .,..,.. '"......."' ..,,. ". . "'""'
. ~ "' ~0, r::: , . - ." : . ~t? s:~1"'(l ..1 l)::-- ..
~ ·~.: .. --e-e-r f.y se,-e'"3 ,.cas.J ... s.
• :,-ocJ~e-,e~ : ;>,.ofess --- a , 2•.:i. ... - .., -
"' - c = ~~~ :,-c- 0 ..- ~,,..u5: ,, t'1 ... ~~ ='\._,S nt?s ~ \\ t~ (' ..._)""~-V C\ ~ r
:)(l•e.,~a
- • •
, ,t-ate...-
- · • :o
c .:,~
-
- " -
::: .. -- ::: 2"J c\:2e~.:1 :.1 ..es ,, ... .:" :(;J 0 .,.),~ct~,-- t''e "!t?' esrs ~1t
•.-,,2 -,,,-.--....,n --!,:""\.M 0"'0 -.
· '- ~ c :::c. 1,.; .s S"3 .. er-0 de-s. --•·e·e S 3 du:\ i:"f .:-ri:> t0 :J'"0:i:>ct t f' .JSc:' ·· !~ e.:- ts.
,, ..,·: "" ,ia\ oe ,eo:>a ru·seo t'\ ..;"e: " c2 Cv "lduc:
• :>cct,re .r, e ;-- : o-ofe,, ·nr.::: , O- .. - . -•
z:. -- ~ - s e o ::: .e,, a·as" ::- re e ·es ..-c-n s !:) e t,Y ~"'2- n ,stod .1 ns1• r
:)f raric e 2'"'1d aiSet, ".,. C"' a
·- re °'" r eo '...'\ o!r-e- ot?-O:; e U"et" C3 co '1 auc( nu\
-e~rese,
r-
....
• •
r e ·· heft o-- ::: :::
or -
O.::"lage or- asse:s be 0"' :: ··,-: : 0 t'1e s,3rer0 dt> ~s 1or ('th~
funders or o,.. ners 1 of : "'e ou s ·~ess . - -
• --.. e stand ·.,~::. cred'o I t'\•1 ar d Hust. or• r h,, e orofess O"1 land tr e c> ,no 0\ ng orga nisa t1. 0n) m ,1\
:::e da~, aged :J"f' fraud and omer for11s of un etr ca coqduc, - 3rd t> nh.,rnced b, t?thica l
Cv"duc . Et h 1ca sta ndards are an mportan t e eri1e nt r. mana bing rt>putationa l ri sk
• Suo o > cria 1 reiatiorsh ps ma, be da n aged b\ unethica conduct to the detri m ent of tht>
bu\ ng_organ isatio n - ard enhanced b\ et hica coriduct Ethical procurt? n-1 ent pr,Ktice s
are ar important eleme nt in a bu\ er s ma in t a ·rnng 'good custome r stat us" it h suppl it> rs
and suopli er commitme nt and Iova It, .
"'\,. -\ p·ca l obstacles to achie, mg good procu rem ent gm ernanc e hm, e, er ma, inclu de facto rs
-r,-such as t he fo ll owing.
Lack of executi ve support
• La ck of co-operatio n from sta keholders in t he int erna l or exte rn al su pp l, cha in
• Poo r !CT syste m s and syste m s integration
• Lack of clarit y in t he govern ance m ode l, codes of co nduct , rules and procedu res
• Lack of resou rces (in cluding ti m e) to inco rpo rate govern ance requ irements
• Lack of co herence and co -o rd inatio n of procu rem ent respo nsibilities

1.3 A governan ce framewo rk for procurement

Here are some key elem ents of a compre hens ive governa nc e framewo rk fo r procu re me nt.
• Regulatory mechanisms: cri m ina l law (in areas such as fraud , corruption and money-

•
lau nde ring); pub li c procu rement law and regu lations; financ ial regulations (eg on
fin ancial reporti ng); standing orders, codes of practice and ethical codes
Checks and balances: internal and external audits; support for whistle-blow ers ; fin ancial
discl osu re re qu ireme nts ; freedom of information and re ports in the publi c domain (to
l
support transparen cy ); the right for suppliers to challenge contract award decisions ;
external overs ight (eg by regulatory bod ies) ; and professional diligence
• Prevention: professiona l independen ce (eg of auditors) ; professionalism (eg CIPS Code of
Co nduct); and anti-fraud measures
• Correction: compliance with law and regulation ; resolution of challenges and di spute s;
organ isational learn ing and continuous improveme nt; and self-regulat ion,

1.4 Typical governan ce mechanisms for procurement

M echanism s supportive of good governance in procureme nt therefore includ e the follow ing.
• A strong intern al control environmen t ~esigne d t o :~pport business objectives and
•d ..,ti d areas of risk · robu st internal po l1 c1es, checks and control mechanism s
manage I enu e ·
 ·cal con duc t in pro cur em ent a
f des of et h , .
.
d Pp lica tion o co d con sist en t ly app li ed pro ce durec:~vir
11 ent an a i~~
• Tlw dew 1opr f f . ethical, trans par ent .an f pro
• f1 1e develoµn1ent o . air, ontr ol and cur em ent spe nd across th s
mo nito ring o
tive bud geti ng, c e
• Tile effec_ .
or gani s,1tion bTt ies and rep o rtin g stru ctur es
nsibilities, accounta ' I fo
fin ed rol es, re spo r
• Clear IY de
proc urem ent . Is of indi vidu al buyers . ..
• Control s ove r th e auth orit y leve and . ti·ons of req uIsI tion s, pro cur em
auth oris a ents a
• Clear requi rem ents for approva Is no
- .
paym ent s d't trails or 'pap er trai ls' to ena ble the trac king of
• The requirement of clear au '
Procurement decisions . ( tha t for exa mpl e, the sam
• The segregation of procure men t duties so e person is not
. ' ·
responsible for authorising and mak ents whi ch mig ht ena e f a IsI"fi catio
bl · n of
ing paym ,
transactions)
• . arti cula r buy er bec om ing too 'cos
Rotation of project buyers, to avoid y' with any
any p
particular supplier . .
• Controls over preferred supplie d sing le-s our cing deals, to ens ure
r lists an tha t they are in
the best interest of the organisation
. . . . h
• The use of e-procurement tool . . . e cash tran sac tion s; to min
s to min1m1s 1mIse uman
pote ntia lly frau dule nt inte rven tion ti II hi hli ht
in procedures; and to aut om a ca
y g g
discrepant (non-matching) data
• The use of physical security mea .
sures (such as safes, pas swo rd pro
tec tion and controlled
access to facilities) to pro tect asse
ts, cash and data
• The effective vetting, selectio
n, supervision and dev elo pm ent
of sta ff in pos ition s of
responsibility
• The use of standard term s and
conditions of con trac t
• Internal aud it of pro cur eme nt proc
esses, decisions and con trol s, incl
checks and reconciliations, and per udi ng acc oun ting
iodic pro cur eme nt aud its.
• Encouraging suppliers and employe
es to rep ort ethical bre ach es ('wh
with out fear of reprisal istle blo win g')
• Establishing an ethics foru m or com
mitt ee to discuss con flict s of inte
issues arising in the course of wor res t and ethi cal
k: open com mun icat ion is the cor
'inte grit y based' approach to ethi ner sto ne of an
cs man age men t

2 P:-acurer1ie11t ethics and respo nsible

procuren,ent
2.1 What are 'eth ics '?
'Ethics' are sim ply a set of moral
principles or values abo ut wha t
'wro ng' behaviour. For individuals, con stitu tes 'rig ht' and
these ofte n refl ect the ass ump tion
families, cult ure s and edu cati ona s and beli efs of the
l env iron men t in whi ch the ir idea
shaped mor e deli ber ate ly by pub s dev elop ed. Ethics are also
lic and professional bodies, in the
and guidelines which are designe form of agreed prin cipl es
d to pro tect society's best inte rest
s.
Ethical issues may affe ct busines
ses and pub lic sector org anis atio
ns at thre e levels .
• At the macro level, the re are the
issues of the role of business and
society: the deb ate abo ut the imp cap itali sm in
acts of glob alis atio n, the exp loita
t he imp acts of indust riali sati on tion of labou r,
on the env iron men t and so on . This
is th e sph ere
 C( l\t)ur:1(lu po\1(1yI r11,I ic-j I.iroC(;( )l lt( t,,
• .,

dure on pr oc ur em en t
,

. t of po licy an d pr oce
5.1 The 1mpac
. , (or
. t nt 'good practice be st pra cti ce ) in pro cu
The promotion of con s1s rem en t typi
e . ti on of a ran ge of de . .
involves the development c1 s1on ru es, processes Cally
1
and appll1c a cu rem en t and
d ·gn ed to sta ff to ac hie ve t he op
procedures tha t are eSI he P pro tim um mix f
ply chain ma na ge me nt • • 0
. . and oth er pro cu rem en t or ob jec tiv es . th
five rights, sup r:
Organisations may need to ffe ctiv e po lici es in reg ard to pro cu rem en
dev_e1op e t and su
chain issues such as the fol PPl1
low ing .
. 'th rel .
• An intention to comp 1 ev ant laws, reg ula tio ns , sta
Y Wt a11 nd ard s, codes of pract;
and best practice benchma l';
rks
• Responsibilities for pro
cu rem en t at dif fer en t sta
ges of the p_roc ~re me nt
cross-functional pro cu rem proces s; or ir1
en t teams (eg wh eth er the
organ1_s~t1o_n fav ou rs ea
and supplier inv olv em en rly buy er
t in pro du ct de ve lop me nt
, an d sp ec ific ati on )
Levels of delegated au tho
rity for pro cu rem en t: in
staff have the au tho rity to oth er wo rds , wh at lev els
take dif fer en t typ es of pro or grades of
need to be 'escalated' or cu rem en t de cis ion s; wh
referred; and wh at checks en dec isio n:
, au tho ris ati on s an d sig
required for various tasks n-offs are
(such as the passing of inv
• The use of defined pro oic es for pa ym en t)
cu rem en t procedures, de
consistent good practice cision rules or gu ide lin es
(eg in areas such as the ad to support
supplier appraisal and ve mi nis tra tio n of ten de rs ore-auctions
ndor rating; the use of ap ;
off contracts, e-ordering pro ve d su pp lie r list s; or the use of call-
systems and purchasing car
• Sourcing decisions (eg ds)
in regard to sustainable sou
supplier segmentation and rci ng, sin gle or mu ltip le sou
relationship de ve lop me nt; rcing;
the use of co mp eti tiv e ten int ern ati on al or glo ba l
de rin g ore -au cti on s) sourcing; or
• Ethical an? su~tain~ble p~
ocurement (w ith objective
and supplier d1vers1ty; fai s and co mm itm en ts for
. ) r trade; supply chain lab ou local sourcin g
an d sourcing . r sta nd ard s ,
; or gre en , spec1·fi ca~+-i1on
Procurement managers ma
y have responsibility for
. developi
proce d ures to enable str
ategic pro cu rem en t objec ng so me o f the se pol1c1 .. es
related policies wil l affec tive s to be and
t the operations of oth er
however. Procurement ma de pa rtm en ::~ :~ ny ~ro cu rem
nagers may no t have the en t- .
standards or controls, bu au th ·t . links in the su pp ly cha
t may have the influence on Y to im po se t in,
recommend the m, and ad (by vi t f . sys d es
vise on the ir design and r ue o the ir spe . 1· t em s, pro ce ur ,
impl . eta . )t
The im pa ct of corporate em en tat ion . 1s ex pe rtis e o
policy and procedure on
pa rt on the nature of the procurem . .
decision in each case.
en t de cis ion -m ak ing de
pends in
• Routine decisions: repetitive, progra
heavily on the use of pre mm ed (of ten low-level de ..
-established procedures
.
an d good practice . Exam . or rules )h_ CISions, de pe nd ing
ples include replenishing , w ich ref le t
points and qu an titi es ; iss sto ck ite m c co rpo rat e po 1·icy
uing call -of f orders, or ord
administering ten de r pro eri ng fro ~ at pre -de te rm ine d orde r
cedures . There are likely
t o be fol low ed , the pa ram to be de tai le~ pr? ve d sup
. ete rs wit hin whi ch judge pli ers ; and
sign-offs and authorisation me nt can be gu idelines
s, and so on . use d th
for the steps
• Adaptive decisions : higher-level ' e req uir em en t for
deci sion s whi ch re quire
supported by relatively sim hurr1an jud
pl e de cisi on tools (such
an aly sis) . Exam pl es includ as sup pli er ap pra7e ~ ent - bu t
e capita l pro cu rem en t dec ca n be
no n-stand ard procurem en is ion s and sou rci~a dor ~est- be
ts . At thi s lev el, th ere ma . ne fit
y sti ll be cor po ra te g fec 1sio f
O ns or
r un ctt on a /
 1 1
, ) ,1 1 I ,

olicies about the leve l at Whi h · ·

P · • c such d .
hOW sue h d ec1s1ons sho uld be ec1sions can b
. d h rnade and h e taken
constrain ts an t e requ iremen t~ w at kind of, . or authorise d; guideli nes for
I . h ,or a bu . audit trail' .
need to co mp y wit rel evant Pol" s1ness case or is requ ired; budgetary
st
rocureme nt po licies). icy frarneworks (such co -be~efit ana lysis; and th e
P · •
as sourcing p0 11
innovative decisions: unique fi . c1es or sustainabl e
• , rst-time de ..
or procedu re. These are generally str . c,s,ons for Which there is . .
sourcing, e-procur ement, o r partners~~eg1c decisions, such as wheth:o ;x1~tingl model
by professio nals or top manager s Ip relations with a supplier Th r o evfte op global
. . h , on a team b • · ey are o en made
complian t wit rel evant corporat e p o 11c1es
• • asis, and while they may need t b e
(eg O h. o
to be develope d o r amende d to take a net ics or CSR)- policies may also have
ccount of new str t . d. .
we will look briefly at some of the aspect th a eg,c 1rections.
s at can be includ ed ·1n procedures for
procurement an d supp Iy, focusing on thee .
xamp 1es mentioned in the syllabus.

,.2 compliance
Law and regulatio n places certain requirem ents on pro d ucts and services which may need
( . .
to be taken into account 1n procurem ent dec·,s·ion-m ak'ing an d controls. Here are some
examp Ies .

• Qual_itY standard s an d tolerance s required to be accredited by various international

quality standard s, o r to receive the European Community (CE) quality mark
• Qual ity standa r ds and tolerance s required for product safety, under health and safety
and consume r prot ection legislatio n and industry codes of practice (eg the strength,
flexib ility or weight-b earing capacity of construction materials; the chemical composition
of materials to avoid health hazards; the restriction of ingredients such as additives in
food products )
• Controls on the use, storage and transport of substances and materials which may be
dangerous t o health (eg chemicals, poisons, lead paint, asbestos, flammable or explosive
mat eria ls corrosive materials such as acids). Examples from the UK include the COSHH
(Control ~f Substanc es Hazardous to Health) and CHIPS (Chemicals: Hazard Informati on
and Packagin g for Supply) Regulations .
• E · • nd regulation dealing with issues such as the safe disposal
nv,ronmental protection 1aw a ' . . •
.. d d f-life products (including electrical and e1ectron,c
or recyclab1l1ty of waste an en -o
waste and batteries ) . . .
d eable about and compliant with, legislation
1
Suppliers should be expected to be know e g th bu;er is still liable in law if he
relevant to their industry and products . Howe\er~ h~s products one high-profile case study
incorporates outlawed materials or compone n sin Mattel which was forced to recall
. I b I toy company ,
is th e problems encounte red by g O a . ch· a because the contractors had purchased
.
rn·111 ·ions of toys manufac ture d un d er licence in f in d' from unauthorised supp 11ers.
· ' b ed levels o Iea ,
Paint contamin ated with US/EU- ann . t .
P efore take proactive steps o.
th requirements
rocure ment professio nals should er 1ega 1 . . h
' '
Draw specifica tion teams atten
k
°
ti n to known
.
n legal require
ments - especially if the law in t e
,
• . .
Draw suppliers ' attention to n~w . ent from that of the buyers
suppliers' country of operation ,s differ d'ts monitorin g and inspection ) on suppli ers
, • e checks (au 1 '
Impleme nt their own complian c
and sup 1• • d environmental stan dards, or
' P ,es . . ·ed under quality a~.
Use suppliers wh ich are certJfi to beco me so certified .
. 5
encourage favoured supp I,er
 'I

l'es mea ns that pro curemen t will need to li ai"c.

• I h<• spcc la li'>t nature of mo 5l r,u pp 1 , - rd er to ensure th at speciti -
II ine ers
an d users, in o ca tior1
J -

cr1ref1Jlly with ~upp ers, eng , f port and servi ce from s . . ·-

,m• com•ct r'l nd that th ey Include provi sio n or su p , Uppl 1 ers 't:·-
' · - ' _,
onBoing maintenance and repair ) w he re requi red, Pre-cont .
ract con tin gency pl;-;
_
>:
% 1r1p
and post-co ntract managem en
t wil l be particula rly cru cial, gi ven the problern~ fau d-
d' ·tti t
suppliers in providing support servic - es res pon 1ng sw1 y o cus t omer req u1 .
r"'m
..; r;/
, _ c ent:, ;;,
replacing defective deliveries, in remote locations , _ _ __ _
• The organisation has no choice about where it locates_ it~ o~er~tln g fa c~lities, (In
the: Uy
for in sta nce, no doubt it would be easier to bu ild an ~ii rig in _Lincolns hire th an
in th~ '
middle of the North Sea_ but si nce the oi l is in fact situated in the latter location,
the
eas ier option is not available ,)
Remote and difficult locations make the provision of the right supplies in the right
place at
the right time much more difficult than it is for most other business types. Procure
ment stat;
will have to give careful consideration to issues such as : how to arrange transpor
t of supplit:)
to remote locations; how to optimise order quantitie s (bearing in mind the add
itional
logistical problems involved); how to store materials safely once they are in place;
and hov1 to
minimise the additiona l costs that all this gives rise to.

4. 2 The ag ri cultural sector

The agricultu ral sector is involved in the cultivatio n, harvestin g and processing
of plant
crops and animal livestock, for use or consump tion in other sectors such as the
food and
beverage sector, the textiles and clothing sector (using plant and animal fibres)
and so on,
Related 'agri-businesses' include manufacturers of agricultu ral machine ry and
chemicals and
businesses working in the science and technolo gy of 'agronom y' (produci ng and
using plants,
encompassing issues such as food productio n, genetic modifica tion, sustainable
agricultura l
methods , or developi ng renewab le bio-fuels, biopharm aceutica ls and other plant-bas
ed
products ) .
The major products of the agricultu ral sector are foods (such as meat, dairy, cereals,
vegetables and fruits), fibres (such as cotton, wool and silk), fuels (such as ethanol
and
biodiesel) and raw materials (such as wood/lum ber, bamboo and resins). A typical
agricultu ral
supply chain might extend from input suppliers to producer s of the raw commod
ities;
intermed iaries (eg agents, brokers or distributo rs); to processors (driers, canners,
freezers
and so on) - and thence into the retail or export supply chain, for supply to national
and
global markets.

Agricultu ral businesses vary widely from small, non-indu strialised farms, mainly
using
pastoral herding or growing organic crops, to huge industria l agri-businesses
(such as
Monsant o). In general terms, however, the main procurem ent requirem ents
for agricultural
businesses will be:

• Agricultu ral machine ry (tractors, harvesters, irrigation equipme nt and so on)

• Agricultu ral chemicals (such as pesticides and fertiliser s)
• Start-up breeding stocks (seed, plant seedlings or breeding animals) , for producer
s
• Feed (for livestock)
• Consumables (lubrican ts, fuel and electricit y for equipme nt and machine ry)
• Packaging or containers
• Support services (logistical, financial and technica l) .
~ The agricultu ral sector present s several key issues for procurem ent and supply chai n
;1· manage ment.
r,• The impo rtanc e of mai ntai ning
fo o d secu
.
ri t y. Th is is so
.
cruci
a I
volum e and
th conti
at ma ny gov
. .
n uity of supply for local an d natio nal
. . .
. ents subs1d1se agricu ltu re (eg the
pro d ucti on of key co mmo diti es su ch as w heaternm .
an ad equa te food su ppl y. , corn, nee, soybeans and mi lk) t o ens ure

• A high degr ee of ri sk and unce t . th supp ly ch ai n, resulti ng from eg :

unpr ed ictab le weat her an d I'1r ainty rough th e
t h ct of pests and dis eases; t he
unpr edict able natu re of b'10 1c ~ate facto rs; · e impa t · •
ogica l processes re ~ e seaso nality ~f produc ti on;
the frequ ent geog raphi cal dista n , ex
or cons umpt ion (creati t ce betw een t he points of produ ction and end use
ly cha in managem ent ri sk); and
poten tial politi cal and nibl~ ;~spo rt-rel_ated an_d supp er
d d p interv entio n (eg in response to food scare s1 co nsum
management, su ch un ce rtaint ies make
~~enf s an ~o on~. In addit ion to the need for risk
ult - wh ich also
e orecas ng
O
prod uctio n, and mark et supply and demand diffic
'
affects the dema nd for input s.
cial flows (credit terms and le nding ,
• ~omp lex supp ly chains, invol ving physical flows, finan
flows (communication) . These may
insur ance arran geme nts and so on), and inform ation
boundaries, and may involve a w ide
span othe r su_pply chains, geographic and political
logistics and comm unica tions are a
range of publi c and priva te sector instit ution s. Poor
majo r sourc e of risk in such supply chains!
g from (a) the poten tial distance
• Logistical (tran spor t and storage) challenges, arisin
use (in global markets); (b) the
betw een the poin t of prod uctio n and the point of
health and safety risks and (c) the
peris habil ity of input s and outpu ts, and associated
dang erous natu re of some agricultural chemicals.
start-up stock - and poten tia l
• Pote ntiall y high capit al inves tmen t in machinery and
rket cycles and low profi t ma rgins
cash flow prob lems , given generally long time- to-ma
cers in the supply chain (eg compared to majo r
• Relatively low mark et powe r for produsuch as supermarkets and grocery chains)
seed supp liers, and majo r customers
h and safety. Law, regulation and scruti ny may
• Regulation to prote ct food hygiene, healt(slaughter and transport of livestock, prod uctio n
affec t input s (eg seed types), processes
l labour policies in relation to
meth ods such as the pasteurisation of milk, ethica
agric ultura l work ers), prod uct labelling and so on,
have seen a grow ing awareness of
Envir onme ntal susta inabi lity issues. Recent decades
• e_g s~il exhaustion; lo~s of biodi vers it y
the nega tive impa cts of main strea m agri-business
~on; the des~r uction ~f natura l
throu gh mono cultu re; wate r deple tion a_nd _cont~mina land;
_ t s and habit ats (thre ateni ng b1od1vers1t y) to increase available agricu ltural d' ·
.. . d . k (' - ·
eco sys em 1ty to 11vestoc in 11v1ng co n 1t1o ns
• d ns · ks of genetic mod1ficat:1on; an crue . .
t h e perce ive are pressures and incent:lves (eg from the Europ ean
) There . . . .
an d Is aug h ter me thods • nt s fo r
) t gan·ic and susta inable agric ulture (changing input requ ire me . .
. .
Unio n to supp or or gin g input
• • • d pesticides for example) and animal husband ry (chan
chemical ferti 11sers an ,
requ ireme nts for buildings and services).

')~r:cr1dc1r y incJu~_;t' ie;~

5.1 Man ufac turin g and asse mbly cts out of
ed in manufact uring: th at is, 'ma kin. g' finished produ .
Seconda ry indu st ries are engat g Th is secto r used to be overwh elmingly t he largest econom ic
impo rtant to the prosperity of the country,
raw mate ria ls an d comp on en s. d ma ins hugel y
. t h UK fo r instan ce, an re omic
sec t or in e , . . dustr ie s now account for a larger slice of the econ
desp ite t he fact that service in
 sti11 employed in
cake . The purchasing literature reflects the fact that very many buye rs are
manufac turi ng compan ies.
th
The main procurem ent requirem ent fo r manufac turing organisa tions is e inputs t o the
manufac turing process. These may be:
• Raw materials, which are processed in som e way {eg by cooking, fermenta tion, refi ning
0
or spinning) in order to create finished products for consume rs ~ pr?du cts for sa le to
other manufac turers (eg turning raw cotton into spun cotton, which is sold to the textile
industry) . Processing industrie s include plastics, steel, oil, gas, electricit y, water, textiles 1
brewing, baking and food processing.
• Compon ents (individu al parts), which are assembl ed to create finished products
for consumers (eg toys, shoes and televisio n sets) or subassemblies or modules for
incorpor ation into further assembly processes
• Subassemblies or modules, put together by another manufac turer and bought in for 'final
assembly' and finishing (eg painting, varnishing and packaging) into finished products (eg
gearboxes and bodies for cars, or hard drives for compute rs) .
In addition , a manufac turing organisation may purchase: capital plant and machinery;
support services (such as marketing, transpor t, IT, security or mainten ance); and ongoing
general supplies which keep the organisation operating. These non-pro duction items are
often called MRO (maintenance, repair and operatio nal) supplies, and include things such as
uniforms , safety equipme nt, lubricants, office supplies, cleaning supplies and so on.
~ S o what are the main objectives and challenges of procurem ent in a manufac turing
f J' organisation?
• Procurem ent is a relatively advanced function in many manufac turing companies. Highly
developed 'world class' techniques such as just in time {JIT), total quality management
{TQM) and materials requirements planning (MRP) will often be used. Many inventory
manage ment and procurem ent processes are now likely to be compute rised. While these
are strategic issues - beyond the scope of this syllabus - it is importa nt to remember the
more complex framewo rk within which procurem ent operatio ns are carried out.
• Operations management is the focal point of the supply chain - and the key internal
customer of procurement. The most importan t task is to ensure that production
processes have materials of the right quality available in the right place at the right time
in the right quantity to keep production going.
• Production machinery is 'hungry': it needs inputs to operate _ and if it ceases operating,
the organisation incurs costs of lost productio n, 'down time', restartin g of the machinery
and so on. Dema~d management is therefore key to maintain ing service levels to internal
customers: ensuring that stocks are reliably available and continua lly resupplied when
needed to maintain the process.
• The sheer number and diversity of components whi·ch may go •into a manu fac tured
product plac_es a bur~~n on procurem ent to maintain records and follow procedures in
order to achieve the five rights' effectively.
• Quality is a very importan t objective for manufa ct unng,• b . . uts can
. ecause defective inp
damage machiner y, and cause waste · Procurem en t must know exactly w hat .1s required,
. . h t the
convey this. clearly to suppliers ' and manage qua i·t . k
I Y ris sand issues throug ou
I hain.
suppyc
• Because of the importance of inputs t th fi . hed product, procurement e~pe rtise which
and contacts may be required thr o e n1s
material s will be best to oughout the process from new product design ( w can
use, a nd most readily avail able?), through specification (hO
 th e requirement most
accurately b
stoc k need to be rep len · e defined tor ._,
• The cost of in . ished?) and so on. upplh•r<; ?), lnVPntory r rin t r1 ,I (D hr•r, 11 111
puts Is a very h' h
w ill have the key ob'ec . ,g Proportion of manuf·
The va lue of m t . J tive of mi nim ising cost ac..turinp, co•,t t,, ',o procur ur,N, t
h . a ena ls Which are bought s - con shtPnt with rnr.1int r:1 ininv. ·,upr,I I
ptrc ast~ spen d, so sou rcing strategie ~n ~ regu lar ba51 s j,, rJ h1P,h propo rti,or 1of tr,L1 l
c os e re ations b etween buyers and s yp1 ca lly focu•. on a 5lim '> uppli(•r bt1•,1- w it h
·t I ·t (
Cap1 a I ems such as pla nt d supp li ers (pa ti cuIur IY for strategic itr-rw. J. '
• . r
. an machinery) ar . .
pure h ases, an d will require sp . I e maio r, specIal 1wd and f)xpr• n·,is11•
·
ti nancing, I ec,a procurement d' · IIn es in 1nvf~•.trrn--nt r.1pprt.1t',dl,
easing, supplier 1 • 1sc1p
. . se ection an d contrac ti ng.
It Is worth noting that procurem t . . .
. en priori ti es may b e su bt IY d'ff I erent acco rd mr, to h() 11
manufacture Is organised.

• Project work is typically carried . .

item of production (eg ·1 ou~ in the co~stru ctio n and engin ee ring indu<.tm~·.. Er1 c.h
I rid
other projects underta:e~ way b ge ~r offic e block ) i.s indivi du~ I and distinc.t fro rr~
k 'ti . , . . by th e same firm - and th e size of th e Job can be va st. Th,,.,
m~ ~s ;.ing a pn.onty for the procurement or supply chain fun ction: sup plies muc.t b~•
1
sc e u e in a precise sequence, to meet the requirements for each stage of the prou·::
• Jobbing production is the term given to bespoke, one-off cu stom er ord ers - bu t on
a smaller scale to projects: for example, a bespoke furnitu re manufa ct urer or potter.
Procurement will have to arrange for a constant stock of items that are used fr equE:ntl 1 -
but will also need to order materials specially for each separate ord er.
• Batch manufacturing refers to the production of identical item s in small or large ba tches :
for example, this Study Text has been printed in a batch of identical copi es . Procureme nt
will have to forecast demand, in order to provide the right quantiti es of ma terials for
each batch.
• Mass production is typically carried out on a traditional 'production line', where items
move steadily from one stage of the process to the next. It is important to avoid any
interruption to the flow, which makes it vital to secure an uninterrupted supply of t he
necessary materials - although this is made easier by constant and predictab le leve ls of
demand.
• Continuous process production (eg oil retini~g o~ the su~ply of gas a?d el ctri_ci ty) is 7
similar to mass production in the need to maintain an uninterrupted flow of inputs.
· · t t to secure standardised inputs - since the outputs mu st als o be
It Is a 1so Impor an
standardised.
. I ted that the structure and priorities of manufactu ring supply
f d d h
Several writers have a so no .
xtent on the complexity of the produ ct ma nu acture , an t e
chains will depend to a Iarge e . t
level of uncertainty and dynamism in its env1ronmen .
. d ·c environments (eg capital inten sive industries such as
I
• For complex good~ ~ yna;~onstruction ), quality man agement and supp ly chain agil ity
aerospace, shipbuilding an . ·t
. .. nsiveness) are a priori y.
(flex1b1l1ty and respo . ments (eg con sumer durabl es or automotive ), value
d . stable environ
• For complex goo sin d-driven supply may be a priority. _
for money and deman . . onments (eg fashion, cosmet1 cs 1 food and beverage ),
. d . dynamic envir .
• For simple goo s in . sponse to short produ ct l1fecycle s· product s are
be key in re
short cycle times may h' ging consum er demand .
5t ents (eg commodi ti es), proces s effic iency and cost
'outdated' quickly by fa -c an_
. table env1ronm .. .
• For simple goods in s . se to pri ce sen s1t1vIty.
k y in respon
improvem ent are e '
r,,,.2 The fast movi ng cons umer good s (FMC G) secto r
.
.in clude things f ecti' on ery, toi letries ' soft drinks.' mass fashion
FMCG prod ucts such as con
th manufa_ct unn~ sector, With th e
items an d so on. The FMCG sector is a special exampl e of e
. arkets I w ith the a,m of high -volume sales.
focus on pro du ction of goods fo r consum er mass m
mass Prod ucer, as di scussed
FMCG manu factur ers will share th e purch asi ng priori ti es of any
above. However:
th e need for FM~G produc ers
• There may be additi onal qualit y considerations arising from
mass 0 f_com petitors.
to bra nd their goods, in order to differe ntiate them from the
, and this mu st be refl ected
Customers tend to expect highe r qualit y from brand ed goods
in the qualit y of their inputs.
les, due to intens e
• The FMCG secto r is characterised by very short produ ct lifecyc
ure to introd uce new,
comp etition and consu mer fashions and fads. There is press
t on procu reme nt by
adapt ed or impro ved produ cts const antly- and this may impac
cificat ion of mater ials,
creating a consta nt need for new equip ment purchases, re-spe
y') and so on .
short suppl ier lead times (supply chain responsiveness or 'agilit

5.3 The cons truct ion secto r

nal works : projec ts such as the
The const ructio n sector is broad ly responsible for const ructio
buildi ngs or structures (eg
const ructio n, altera tion, repair, maintenance or demo lition of
instal lation of fitting s (eg fo r
roads, power -lines , pipelines, bridges or indust rial plant} ; the
so on.
powe r supply, ventil ation, water supply, fire protec tion); and
ts, the procu remen t
As const ructio n typica lly involves large-scale, comp lex projec
e: mater ials (such as bricks,
requir emen ts are very varied. Input requir emen ts may includ
s (such as pipes and wiring} ;
stone or steel}; equip ment and machinery; fixtures and fitting
lifts or air-co nditio ning
specialist projec t comp onent s (such as found ations , scaffolding,
archit ectura l services, interior
systems); specialist trades or services (such as surveying and
and electr ical); and negotiated
or exteri or design, projec t management, plumb ing, carpe ntry
electr icity, gas, water or se wage
agree ments with infras tructu re providers (eg town planners,
facilities).
l factor s in procu remen t
Subco ntract ing and integr ated projec t mana geme nt are crucia
specia list expertise for
for const ructio n projects, enabling the prime contra ctor to access
ning systems). An integrated
incorp oratin g specialist comp onent s (such as lifts or air-co nditio
multip le, integr ated supp ly
projec t team approach is comm only used, bringi ng togeth er
- which is then integrated
chains into one supply team (the prima ry or first-ti er contra ctor)
mana geme nt of the kinds of
with the client-side projec t team. This struct ure suppo rts the
projec ts .
complex supply chains often emplo yed in major const ructio n
rt projec t workin g, co-
Supply chain relationships are also crucially impor tant, to suppo
UK's Nation al Procurem erH
ordina tion and co-operation over lengthy, complex projects. The
is the biggest single area
Strategy for local gover nmen t argued that: 'Cons tructio n spend
It follow s that getting the
of local autho rity external expen diture [especially on roads].
likely to bring huge beneht 5 •
procu~ement of con~tructio~, repair and maint enanc e right is
ring it defec t and disput e
Benefits such as getting the Job don e right first time, and delive
free, also ad d rea l value. Many autho rities have discovered that th e be st way they can seCl1re le
. . ctors and the who
fi long-t erm re lations hips with th eir contra
th ose bene ts is by developing
suppl y chain .'
,r
·
The con struction industry as a h
. w ale has faced a nu
• A poor reputation for qualit d . mber of challenges in recent decades.
t ti . Y, ehvery cost
re pu a on is a potential source of d"ff
control and health and safety. Positive
added value. Industry Codes of C ~ erentiation, competitive advantage - and therefore
people; procurement an d integ ~n uct_(such as the UK's Construction Commitment to:
and health and safety) have b ra on; client leadership; sustainability· design qua lity·
. een developed to ' '
service . support the adequacy and consistency of
• Pressure to re duce its very h" h .
ig environme nt al · (
usage and waste generatio n) d . impacts such as energy and water
constru ction projects com m· a~ t o cont ri bute t o sustainability targets - particul arly in
in developing sustainabl iss,~ned by th e pu bl ic sector. Procurement may have a role
e materials an d t ech I . d . .
of ha ulage and gener 11 . . no og,es, re ucmg the carbo n footprint
.a Y provid ing lead ers hip in an industry that has so far been slow
t o em b race' t h e sustainability agend Th U
Construction (BERR 2 . a. e K governme nt's Strategy for Sustainable
. ' OOB), for instance, advocates 'a chieving whol e life valu e through th e
promotion of best practice t , . . .
. cons ruction procurement and supply side integrati on'.
• Dow~turn in th e housing and comm ercial property market, due to global recessi on,
creating pressures fo r cost red uctions to support profita bility.
• An adversa rial supply chain climate, and fragmented supply chains, due to entrenched
competiti ve an d transacti on al relationships with subcontractors and suppliers, and a
tre nd towards contractors unilaterally imposing price reducti ons on suppliers, in order
to keep bids competitive . This has created pressures for integrated proj ect t eamworking
(to su ppo rt m o re innovative, sustainable, buildable, client-focused sol utions) and more
integrated supply chains ('joined up thinking'), so that learning and development can be
carried forwa rd from one project to the next.
• The use of outsourced, subcontracted and casual labour, creating problems for health
and safety (no time for ongoing training), capability development (no continuity) and
su sta inability (no opportunity to secure 'buy in'). This may also be a procurement issue,
with the need to drill down through the supply chain to monitor and enforce ethical and
safety standards.
Lysons & Famn • gt lso ·,dentify a number of distinctive features of the procurement of
on a . . . .
• f ti"
supplies or construe on,
·,n comparison to manufacturing or service organisations.
. . (f h"ich supplies and services are procured) may be far distant from
• Construction sites or w
·t perhaps even in a different country.
the procurement uni , . • · h
r (such as brick stone or steel) have high bulk and high we,g t,
• Many con st ruction suppl ,es The high cost~ of transportation and handling must therefore
despite relatively low va u~. f se to the construction site.
. . . d
b e minimise by sourcing rom cIo
, eg ) · often an issue on construction sites which may
'If
1 e and damage ,s '
• Security (theft, P erag . f upplies should be scheduled as close as possible to the
lack storage facilities: del_,ve~~-~s: in time supply).
time when they are require J nt will have to be agreed with the site engineer or
. ntory manageme
• Procedures f or inve rement officer may be off-site.
·nee the procu . .
project manager, s, ferred from one site or construction proJect to
• Supplies may aIso nee d to be trans accurate stock management, trac k'1ng an d con t ro.I
h pressure on
another, putting furt er . t managers may have discretion to arrange for the
•
·
Architects, site engine ers or .proJeC quiring strong communication,
· · 1·1a1son
· an d co-
supply of materials an d services, re ment officer (or the contractors procurement uni·t} .
'
. o·ect's procure
ordinatio n w it h th e pr J
 · • manufacture simp ly to comp!
1
. th
nd enabling e finda mand. This is the basis of 'lat ete
d expertise, a ustomer e 'fi . e
cha in technology an . II ·n response to c bled to consumer spec, ca tion (bas
potent1a Y, 1 re assem ed
the assem~ 1Y~- PCs, for exa mP 1e, a ed to hold stock.
cu stomisation . ma ny blies) - without the ne h"ch is not yet ready for sale to
on modularised assem art-fi nished output, w I
. rogress refers to p
• Work m P i·ty prod ucti on mate rials can lead to
cu stomers. f high-q ua ' f
1 o procurern en
. . nd secu re sup p1y o . . •ficant costs. The roe
Fa ilure to obta in timely a_ g ope rations, in curring s1_g~1 t her whe n we look at th e t
disruption in manufacturin . . . e wil l discuss t his ur
rofessional s is therefore criti ca l. wf procurement in Ch apter 11.
P ntext or · · d· I ·
manufacturing sector as a co t staff must bear in m in in re ation to
of the considerati ons that procuremen
Here are so me
production materials. h Id we manufacture internally, as opposed
, . . . t what extent s ou d . th
• The 'make or buy dec1s1on . o d h been towards re ucing e amount of
to sourcing from outside? The modern tren as
internal manufacture. . 'th functions such as design and
• The need for cross-functional ~ollabor~fi~onti_(w1 for materials procurements
· · ) t produce effective spec, ca ans
engineering O I' ·n the procurement process, in order to take
1 1
• The need to involve potential su~p ,ers ear y be particular issues to negotiate with
advantage of supply chain expertise. There may a1so h ·t . d
. . 1. d t oling to produce t e , ems require .
suppliers, eg the cost of developing spec1a 1se o

3.5 Goods for re-sale

In businesses such as retail, wholesale and brokerage, buyers are purchasing finished _goods
for sale onwards to customers - with little or no work done on them by the intermediate
organisation .
Retailers, wholesalers and brokers primarily buy the goods they intend to sell. This may
include a wide range of different goods (as in a supermarket or department store); or a
smaller range of speciality goods (as in a greengrocer, toy shop or consumer electronics store1
say). The 'package' sought from suppliers may also include added value or service elements 1

such as sale-or-return arrangements; training for retail staff in the demonstration and
handling of goods; or contribution to display and advertising costs.
Issues such as quality control, service levels and supplier relations will be important in the
procurement of goods for re-sale - as they are in the purchase of production materials -
but some of the procurement or supply chain function's priorities will be different. Arjen
van
. .Weele. (Purchasing Management: Analysis, Plann,·ng and pracL,ce +; ) •
summarises some
distinctive features of the procurement of goods for re-sale as follows.
• Bottom line thinking. Wholesalers and retailers a t. . h 1ue
h . re no in general adding muc va
tot e produ~ts they sell, and their margins are therefor . rs must
focus on buying what will sell at d . . e somewhat tight. Buye
goo profit margins.
• Broad assortment. One of the functions pert d
is to make available to customers a .d orme by wholesalers and retailers
1
manufacturers. Th e number of stoc; • e range of goods offered by many different
1
hi.gh - and this has implication s for b ines and the numb er of suppliers
. . IIYve rY
is typ1ca
supplie r terms and condition s. uyers attempting to monit or prices, qu ality and
• Buying against supplier speciflcati
·ti . ans. 1n general te y
speci es the materi als and parts it . rms, a manufa ct uring cornpa n
. .. . re quires fo r produ ti . who
ca n mee t its specification s. Reta ·i c on, and sources supp liers
' ers, on t he other h d . .
an , Wil l genera lly bu y what is
 avc.1i1 Jble on the market as des 'b
e<isier for the retdiler a~d suppcl~' edlb~ th e suppl iers. Changing sup pliers is t herefore
' 1er re at;
• Short feedback loop In resal ans t e nd to be less dura ble .
· e contexts bu ·
in time. It very quickly becomes · ying a product an d selli ng it are close toget her
apparent w hich Ii · .
response to such inform ation is k . nes are se1ling and which are not : fast
a ey req uirem ent f
• Technical complexity In ret .1 • or procurem ent.
· a, organisations t h ·tI
technical complexity, whereas in indu . ' .e ems purchased are usually of low
st
knowledge may be indispensable. ri al buying a procu rement offic er's t echnical

Let's now look at a key category of in direct

procurements: MRO su ppli es .

3.6 Maintenance, repair and operati ng (MAO) suppl ies

MRO supplies have been defi ned as ' II d ·
a goo s an d servic es (other th an capital equipm ent)
necessary t o transform ra w mat eria ls d ·
. . . an com ponents into end products'. They includ e such
items as paint , lubri cants, packing materi als, clea ni ng prod uct s and industrial clothing.
Al l man ufactu rin g pl~nts use M RO suppli es regul arly, and t he number of MRO items may be
very large . Some estimates suggest t hat a reasonably large ma nufa cturin g plant will carry in
excess of 10,000 M RO st ock lin es . Alt hough usage of any parti cular part may be relatively low,
the pot enti al for incur r ing high procurement and stockholdin g costs is clearly high, especi all y
if stock 'prol iferates': th at is, if th e ra nge and vari ety of items, models or brands increases
over ti m e, as different users specify different ite ms - without considering whether an item
already in stoc k, or a gene ric ite m, would do th e job.
In add iti on, the rea l value of MRO items may not be fully reflected in their purchase price .
Their abse nce, or defective quality, may in some cases cause costly disruption to production
- an d it w ould be m ore appropriate to measure their val ue in terms of the additional costs or
lost revenu e that m ight result.
Despite th e lower value and complexity of MRO items compared to direct procurements ,
it is the refore important for organisations to exercise sound commercial disciplines in their
procurem ent. However, this is not always recognised: firms may lack defined policies and
proced ures for MRO purchases. It is often left to user departments to order MRO items
wit hout input from procurement specialists - and with little control over expenditure, value
for mon ey or supplier selection .
Th ere are particular difficulties in establishing appropriate stock levels for MRO items .
• In many case s t h e ac t ua I u sage of the item will be very. low, or zero in. some periods : . _
. ·t · t obtain relatively cheap insurance against a hazard that 1s
the purpose of stoc k mg 1 1s o h'
unlikely to occur, for example a fault in a particular mac ine ..
• The numerous items of MRO supplies are subject to a v~ry wide range odf demand levels.
I for each is a daunting prospect, an may not seem
Determining a stock level separate Y . f preciated
cost -effective if the total cost of such items is not uII y ap ·
ent is therefore essential.
A system atic approach to inventory managem _
t I described and a comprehe nsive ca talogue
• Each item of MRO supplies mu st be accura e Y
develop ed . . d • ti'on and variation - should be
. . . reducing up 1ica
• Opport unities fo r ra t10nal1 sat1on -
investigated . t I prefera bly on a com put eri sed system (..-,s
• Stock movem ents must be reco rd ed acc ura e y,
di~cussed in Chapter 10) .