Analyzing Business Needs and Procurement

• Sourcing requirements from external suppliers commits an organization to a cost and a liability
• The cost reduces the profitability of an organization
• Sourcing decisions create a liability in terms of a future payment, if the requirements aren't paid for in cash
• Sourcing from external suppliers should create value over and above the cost
• The greater the value of external requirements, the greater the risk to the organization if the extra value is not created
• Evaluate the costs and benefits of proposed procurement, and verify that the procurement meets the strategic needs and goals of the organization
• A business case documents the cost implications of a proposed project against its expected benefits

Analyzing Business Needs

• Procurement teams should never write a business case in isolation from the rest of the organization
• Procured items should help further the organization’s corporate goals
• The business needs will influence what gets procured, from which markets, and how
• Type of purchase, implications of business needs, and the role of procurement are all factors

Type of Purchase

• Straight rebuy, modified rebuy, and new purchase
• Straight rebuy is the procurement of something that an organization has bought before with the same agreed specification, usually with an approved supplier
• Straight rebuys are routine items for continual operation, examples including MRO items, stationary items, and raw materials
• The transaction is often of low value and low risk with alternative suppliers available
• Straight rebuys require minimal research, usually done when re-letting the contract
• Straight rebuys are often a ‘call off’ from an existing contract or 'framework agreement'
• Purchasing or procurement cards (P-Cards) can make purchases without formal procurement for low-value items
• A modified rebuy includes some small changes to a product/service that has been sourced before
• Examples include modifications to specifications, changes in quantity, or purchase price
• Modified rebuys require more buyer effort and problem-solving skills
• Modified rebuys are common for components for production, consulting services with a new brief, and software based on the number of users
• New purchase activities occur when the organization identifies a completely new requirement
• It utilizes items/components not sourced before, compliance requirements from legislation, or when tech changes and new equipment is needed
• Procurement skills are most needed for new procurement activities, sharing project characteristics
• Business requirements must be understood before writing an effective specification and researching the supply market
• Key supplier capabilities must be researched before writing invitation to tender documentation and managing the tender process

Implications of Business Needs

• Organizations must achieve a mission or purpose in either the public or private sector
• Private sectors will supply customers with products that improve every day needs and maximize its profits and financial return to shareholders
• Public sectors provide public services that are not available, or better delivered from the private sector
• An organization’s mission determines business needs which affect what procurement sources
• the acronym RAQSCI determines business needs
• RAQSCI includes Regulatory, Assurance of supply, Quality, Service requirements, Cost and Innovation
• Regulatory covers any legal or requirement of regulatory bodies
• Assurance of supply covers the continuous supply of goods/services when required based on capacity, financial stability and risk
• Quality is the consistency, repeatability and how fit for purpose
• Service requirements are flexibility, availability or support such as help desks
• Cost. Is only after factors have been met should cost be considered in price e.g., target costs, whole-life costs
• Innovation finding ways too improving customer experiences with the use of technology and capability improvement
• The order in the RAQSCI model focuses attention on tradeoffs
• Involve a range of stakeholders within the organization to define business requirements and agree on any compromises
• Identified business requirements inform Define evaluation criteria, test available options, develop performance measures, and re-evaluate sourcing strategy
• Example using the RAQSCI model can help to identify business requirement for adult social care: compliance, being financially stable, consistently achieving quality standards, a help desk available a certain amount of hours, etc

Business Needs for Each Purchase Item

• Analysis should be summarized and shared with stakeholders, balancing competing needs to achieve buy-in
• Straight rebuys already will have defined specifications and contracted suppliers
• The testing occurs on annual planning cycle, not every time item is replaced
• New suppliers are not considered and ordering is approved and routine and low expertise is required

Considerations for Modified Rebuys

• Important for cost reduction, a sourcing strategy includes define the scope, assess spending, supply market, total cost
• Identify potential suppliers and develop strategy optimizing risk/costs
• Decide the route to market and new supply agreements
• The sourcing strategy is a continuous cycle and scope is most important. Wrong scope makes it impossible to save money and deliver better service

New Purchase Activities

• Many departments are usually involved and has not been used before, so risks arise over: Marketing agreement on quality needed levels, financial agreement, manufacturing and engineering requirements are all checked
• New purchase situations have: lack of experience/information, must review other methods of meeting the need, and may require follow-on straight re-buy orders

Procurement's Role in Business Cases

• Should explain why something needs to be done and seeks approval/finance for the recommended action
• Procurement business cases can be for expired contracts, necessity of cost-reductions or an alternative product with a number of benefits
• An opportunity/problem should first be identified to know if the business case will exploit or solve
• Problems can be divided into ‘Closed’ problems and the ‘Open ended’ problems blocking progress to an activity objective
• Problem-solving corrects situation with closed problems or unblocks open ended

Problem Solving and Analysis

• Some closed problems procurement might face: price of materials, lower off-contract, employee not achieving targets, the level of high invoices
• When faced w. a problem people often jump straight to a solution, which isn’t effective because the real problem was never identified
• An approach is to move from the problem into solutions with problem definition, collection, insight, data, analyzing and hypothesis

‘5 Whys’ and Kepner-Tregoe

• Another method to identify and defines the real problem. Which leads to collection of data and ideas for solving
• "Easy Solution" involves hospitals identifying why so many operations are canceled
• 1 to find "real" solution - train the employees properly
• The Kepner-Tregoe approach, used by NASA, consists of analyzing situations with many questions. Is the problem, distinct, where, and how, when did or didn't the problem occur?
• For open-ended problems, start by writing it as “How do I...?” to stimulate the Generation of options

Steps to Solving Problems in Procurement:

• What is the current situation and the steps include target setting with defined "performance monitoring systems"
• Interviews, observations, questionnaires etcetera to gather data
• What are the underlining issues? Draw conclusions that develop problem definition via data
• Identify strategic Options
• What is the best option?
• How should we implement the plan?
• Have we achieved our objectives?
• What can we improve?

Techniques

• The Scampers acronym is used to frame a question to stimulate generation of of solutions for solving problems
• It is designed to work a range of problems, by implementing the right action, then having the correct tools, and assigning correct definitions so you can meet the stated objectives
• A business case includes a risk assessment and what can reasonably mitigated

Business Needs for the Business Case:

• Executive Summary includes summaries
• Long-term, business objective and the alignment with financial reporting
• Strategy and cross-functional requirement discussions are all included
• Returns on Investment, and return of risks
• Analysis, supplier review, objectives from a broad range of resources such as databases, finance reviews are to the final detailed solution

Value Creation for the Organization:

• Profit: This can be raised if there is better output, or increase with better financial assistance
• How you handle supply and demand
• Senior financial success can increase a procurement business through greater profit, and better asset values
• Improve productivity which would lead to a better profit
• Make sure the work is worth the output and that any additional help is worth a proposal for the business
• Cost, and any potential to the business

Pricing Strategy

• Use more of your supply chain to gain additional sources so there is better risk mitigation
• Senior managers focus should not stray from the details for the company
• Look into the business and find out a situation in the past that is similar to what can be used for value
• Create and give "evidence of support"
• Look for familiar/simple ways those people can understand those types of situations
• Cost is determined by price analysis;
• By value analysis; and/or -Cost Breakdowns

Price Determination

• Should cost" Analysis, looks at the costs to create the item and will then be purchased from suppliers
• "Total Cost Modelling" uses a process which makes costs for the company, and makes the company "profitable"
• "Open book costing" is when companies work with each other in a way that involves "cost plus"
• What percentage is the quality or quantity of the good

Market Data

• Look for more data and pricing strategies in all types of market segments
• Target Market needs
• Check with others for prior information
• Desk/Filed research with trade information ,commercial publishers , trade publication and data
• Make better, well-informed, decisions

Costs: Direct vs. Indirect

• Premise Costs, that are paid for in a floristry and some direct costs
• Identify how much comes "in" from operations, store & receives output good

More Key Point

• ValueChain models is a way to analyze and put together with suppliers better: through the output and services that are sold to customers for more money and greater prices
• To perform service
• You must first calculate and fix costs then perform service
• With more production

Analysis Technique's

• Be aware of market position
• The process of analyzing cost (Value Analysis) to ensure efficiency and maximize income " 'Should cost Analysis'" and " "Supplier cost breakdowns" that determine process
• "Total cost modeling" finds the provable Cost
• "Life cycle costing" or "total cost of ownership" are key if the analysis or product is is critical to it's nature

Additional Analysis Technique's

• First-the-analysis should help set "target costs" so there are correct costs and they can be achieved.
• Then check and review the data for a survey
• Make you consider the best way to solve
• Make an objective review"

Benefits:

• Benefits vs Cost
• Objectives
• Look at and use a benchmark analysis
• The above are key if working to understand best approach, tool
• By keeping processes and tools together the company can create the new hybrid options and find their preferred, so each individual process can bring a "fair deal"

Financial Budgeting:

• Know what goes on with data
• Reviewing of financial models
• The proper team needs to be selected and reviewed" so they can properly be assessed
• Always be good for strategic vision; and financial accountability