Procurement Principles and Management Overview

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Questions and Answers

What percentage reduction in purchasing cost can world-class procurement typically achieve?

2–5 percent

5–7 percent

8–12 percent (correct)

10–15 percent

Which capability is NOT mentioned as a contributor to supply management effectiveness?

Structure and process

Talent and skills of procurement teams

Digital tools and systems

Supplier relationship intimacy (correct)

In strategy definitions, what does the term 'position' refer to?

A consistent stream of behaviors

Locating an organization in an environment (correct)

A way to outwit a competitor

A course of action to deal with a challenge

Which aspect is emphasized as a requirement for talent in world-class procurement?

Market expertise, analysis, and insights (D) Signup and view all the answers

How can procurement teams track supplier performance effectively?

Using digital tools and dashboards (C) Signup and view all the answers

What is one of the key goals of effective negotiation with suppliers?

To seek mutual benefit through economically superior performance (D) Signup and view all the answers

Which statement best describes the classic definition of procurement?

To purchase materials of the right quality from the right source at the right price (B) Signup and view all the answers

What significant impact did collaborating with suppliers have for Astrazeneca?

Reduced the time it takes to swap data by 70 percent (A) Signup and view all the answers

What is an important aspect of sustainable supply management?

Adopting environmentally responsible practices (C) Signup and view all the answers

Which of the following steps is NOT part of the procurement process?

Implement marketing strategies (D) Signup and view all the answers

Why might procurement often lack a strategic focus?

It is frequently viewed as an administrative function (D) Signup and view all the answers

What is the primary purpose of supplier relationship management (SRM)?

To develop collaborative strategies to maximize mutual benefits (A) Signup and view all the answers

What is a key reason for the increased importance of procurement in organizations?

To drive strategic value through effective resource management (D) Signup and view all the answers

What type of risk can lead to a loss of revenue due to operational supplier failure?

Operational risk (C) Signup and view all the answers

Which risk is associated with the vulnerability of a business to supply unreliability?

Supply risk (C) Signup and view all the answers

What are the risks that only the buying firm can manage?

Technical reviews and compliance audits (B) Signup and view all the answers

Which strategy is NOT mentioned as a post-Covid risk mitigation strategy?

Enhancing market competitive strategies (B) Signup and view all the answers

What aspect of procurement is linked directly to a company's competitive advantage according to Ford?

Procurement control of profitability (B) Signup and view all the answers

Which risk could potentially threaten market share through loss or theft of intellectual property?

Strategic risk (C) Signup and view all the answers

Which risk management task is typically NOT considered a responsibility of the supplier?

Market analysis for procurement (B) Signup and view all the answers

What is a primary objective of procurement in an organization?

To provide materials and services to meet organizational needs (C) Signup and view all the answers

Which of the following is NOT a specific objective of purchasing?

Developing employee personal skills exclusively (C) Signup and view all the answers

Which of the following is a characteristic of quality risk in procurement?

Different perceptions of quality standards (D) Signup and view all the answers

What role does effective relationship management play in procurement?

It ensures continuity of supply (A) Signup and view all the answers

In the context of strategic procurement, which practice is considered essential?

Aligning procurement with the organization’s overall strategy (D) Signup and view all the answers

Which risk category is highlighted in the context of procurement?

Fraud and corruption risks (D) Signup and view all the answers

What is the benefit of employing digital and analytical tools in procurement?

To add value to the procurement process (A) Signup and view all the answers

What is an important factor for procurement transformation as indicated in the Hertz case study?

Aligning procurement with overall business strategy (A) Signup and view all the answers

How does procurement contribute to the ethical and sustainable purchasing objectives?

By obtaining best value through diverse means (B) Signup and view all the answers

What is the primary purpose of a mission statement?

To answer the question ‘What is our business?’ (C) Signup and view all the answers

Which of the following is NOT a stage of strategy implementation?

Defining the mission statement. (A) Signup and view all the answers

What characterizes strategy when considering its long-term direction?

It is concerned with the scope of organizational activities. (D) Signup and view all the answers

Which factor does NOT determine procurement potential?

Market complexity (A) Signup and view all the answers

SWOT analysis is primarily used to identify what aspects of an organization?

The strengths, weaknesses, opportunities, and threats. (C) Signup and view all the answers

Which of the following statements about strategy characteristics is true?

Strategies are aligned with the values of powerful stakeholders. (D) Signup and view all the answers

What does high supply chain complexity indicate?

Many parties involved such as agents (C) Signup and view all the answers

What is an important step in the strategy implementation process?

Framing policies and procedures. (B) Signup and view all the answers

What is a characteristic of high financial risk?

High cost of production losses (B) Signup and view all the answers

A newbie design would be considered what level of risk?

Higher risk due to uncertainty (C) Signup and view all the answers

What question does the level of organizational strategy primarily address?

What business should we be in? (A) Signup and view all the answers

Which factor is linked to high procurement potential?

Many competing sources (C) Signup and view all the answers

Which aspect of strategy relates to matching an organization’s resources with its operating environment?

Strategic alignment. (B) Signup and view all the answers

What does not contribute to supply risk?

Frequent purchase history (B) Signup and view all the answers

How is a low-risk scenario characterized in terms of supply/demand balance?

Excess capacity exists (B) Signup and view all the answers

What is a vital aspect of determining supply risk related to product quality?

Effectiveness in fulfilling its role (B) Signup and view all the answers

Study Notes

Procurement Principles and Management in the Digital Age

The book, "Procurement Principles and Management in the Digital Age," is the twelfth edition
The book is published by Pearson
Authors include Peter Baily, David Farmer, Barry Crocker, and David Jessop
The text discusses procurement objectives and development, procurement scope and development
The objectives of the chapter include discussing the scope of purchasing and procurement, the changing role of purchasing and supply, highlighting the evolution of purchasing concepts, identifying procurement cycle, introducing a risk category, key practices in developed strategic procurement, and mini-case studies.

Scope of Purchasing

Supply materials and services to meet organizational needs
Ensure continuous supply by maintaining existing and developing new sources
Efficient and wise purchases through ethical, diverse, sustainable means
Maintain sound relationships with other departments to ensure effective organizational operation
Develop staff, policies, procedures and organization to achieve objectives
Employ digital and analytical tools to add value

Objectives of Purchasing

Select the best suppliers in the market
Enhance new product development
Protect the company's cost structure
Maintain correct quality/value balance of supply
Monitor market supply trends
Negotiate effectively with suppliers for economic benefits
Adopt environmentally responsible and sustainable supply management
Promote diversity in the supply chain

Procurement Definition

Classic Definition: Purchase materials with right quality, quantity, from right source, at right place, time, and price
Modern Definition: Procurement's purpose is to explore opportunities in the market for supply, implement strategies for best possible supply for organization, stakeholders, customers

Procurement Process

Basic Steps: Identify need, Define need, Develop contracts, Source market, Evaluate suppliers
Continued Steps: Invite quotes/tenders, Analyse quotations & select, Negotiate best value, Award contract, Contract management & Supplier Relationship Management (SRM)

Procurement Process (Continued)

This section details the procurement cycle procedures for key phases
Procedures include identification of need, notification of authority, requesting quotes, creating a legally-binding contract

Activity (Examples)

Examples of activities include questions about laptop specifications, budget approval, RFQ content, criteria for supplier selection, contract details, contract management and a question about how procurement helps an organization fulfill obligations.

Risk Management

Operational Risk: Supplier failure delaying or interrupting the flow of goods potentially impacting revenue
Quality Risk: Low-cost country sourcing can expose procurement to suppliers with differing quality perceptions and standards from its customers
Compliance Risk: Increased awareness of social, ethical and sustainability regulations carries risk of legal intervention
Strategic Risk: Exposure to intellectual property loss, theft, affecting market position and share

Risk Management (Continued)

Supplier-managed risks: contingency planning, matching resources, contractual relationships, design checks, sufficient capital, life-cycle product support
Buying firm-managed risks
Risks managed jointly

Research (Findings)

Strategic procurement alignment with corporate strategy 85%
Affecting less-common spend areas (R&D, marketing, legal)
Increasing collaboration with suppliers and innovation
Sustainability and diversity in focus
Strategies implemented post-COVID: improved visibility, supplier switching agility, increased collaboration, inventory increase(just-in-case), and multi-sourcing

Case Study - Ford

Purchasing and supply management is directly linked to business strategy by Ford Motor Company impacting competitive advantage

Kraljic Procurement Positioning

Categorizes procurement strategies based on market complexity and spend/profit potential into Leverage, Non-critical, Strategic, and Bottleneck categories

Market Complexity / Risk

Supply risk = vulnerability to supply unreliability
Technical risk = risk during/after installation
Factors affecting technical risk: Reliability of sources, Commodity/service availability, Supplier response, Product quality

Market Complexity/Risk (Continued)

Supply risk relates to likelihood of commodity/service unavailability and cost resulting from its non-availability.

Examples of Factors Determining Risk

High risk factors include First-time purchase, demand exceeding supply, many parties, High cost, environmental sensitivity, new innovative design, and complex manufacturing.
Low risk factors include Frequent purchase, excess capacity, Direct purchase from OEM, low environmental sensitivity, proven design, and simple manufacturing

Examples of Factors Determining Procurement Potential

High potential considerations include many competing suppliers, high value of spend, spare capacity, identical processes. low or no involvement early buyers agree specifications.
Low potential considerations include Monopoly or oligopoly, low value, no excess capacity, experienced cross functional teams using contract types with procedures.

Best Practice in Strategic Supply Management

Aligning procurement strategy with corporate strategy
Contract and supplier relationship management including lean agile supply, Kaizen TQM, Six Sigma, value added, elimination of waste
Digitalization, AI, Blockchain, analytics, innovation, CSR, sustainability, diversity, and global sourcing expertise
Responsive and ready for change

Research by Bain & Company

World-class procurement reducing cost base 8-12%
Additional annual savings 2-3% delivered through structure and process alignment for cross-functional teams and expertise
Talent/skills and digital tools are essential

Strategic Procurement - Definitions of Strategy

Plan: A course of action with guidelines to deal with situations.
Ploy: Special maneuvers to outwit opponents.
Pattern: Consistent actions, intended or not.
Position: Locating an organization in its environment.
Perspective: Concept of perceiving the world.

Strategic Procurement - Strategy Formulation

Vision Statement: Realistic, credible, positive projection of an organization's future state.
Mission Statement: Answers "What is our business?".
Objectives: Explicit results desired to achieve.
SWOT Analysis: Analyzing strengths, weaknesses, opportunities, and threats.

Homework (Example Tasks)

Research an organization and list three examples for each of the requested categories including strengths, weaknesses, opportunities, and threats.

Stages of Strategy Implementation

Communicating strategic plans
Obtaining commitment from stakeholders
Framing policies and procedures
Setting operational targets and objectives, assigning responsibilities
Changing organizational structures
Allocating resources and budgeting
Training employees

Homework

Differentiate strategy formulation and implementation.

Eight Characteristics of Strategy

Long-term direction
Competitor advantage
Scope of organizational activities
Matching resources to the environment
Building/stretching resources/competencies
Major resource changes potentially required
Impact on operational decisions
Influence of those with power

Levels of Organizational Strategy

Corporate Strategy (Top Tier): Defining company business and establishing objectives
Business Strategy (Middle Tier): Integrating unit strategies and developing core competencies
Functional/Operational Strategy (Lower Tier): Effective employment of skills and competencies

Activity

Impact of government legislation on procurement strategies

Self-Assessment Tasks

Outline the differences between purchasing and procurement.
Highlight the value-added aspects of procurement processes.

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Description

Explore key concepts from the twelfth edition of 'Procurement Principles and Management in the Digital Age'. This quiz covers the scope of purchasing, the evolution of procurement practices, and the importance of maintaining ethical and sustainable sourcing. Test your understanding of the procurement cycle and strategic practices discussed in the book.