CIPS Level 4

L4M1 – Session 1 Study Notes

Supply Chain & Procurement Fundamentals

1.1 Compare the concepts of procurement and supply chain management

1 KEY DEFINITIONS

Procurement is a strategic function of a business and involves obtaining something. This may be
tangible, such as good, or intangible, such as services. The procurement process begins by identifying
a need and is complete once the goods or services that meet that need are delivered.
Elements of procurement:
1. Added Value
2. Cost
3. Inventory
4. Logistics
5. Purchasing
6. Quality
7. Supply
8. Waste management
The supply chain encompasses all organisations and activities associated with the flow and
transformation of goods from the raw materials stage, through to the end user, as well as the
associated information flows.
A typical supply chain consists of producer (raw material), supplier, manufacturer, distributor, retailer,
and consumer.
OR
A channel of goods distribution, which starts with the supplier of raw materials or components,
moves through an operational process to the distributor and retailer, and finally to the consumer.
The primary sector includes industries that extract natural resources from the Earth like mining coal
or metals, drilling for oil, agriculture, forestry, and fishing
The secondary sector includes manufacturing and construction industries. Raw materials are
converted into finished products.
The Tertiary sector consists of industries that provide services. These are businesses that supports
the production and distribution process.
Supply Chain Management (SCM) aims to reduce costs, improve value and reduce risk. It should give
the supplying organisations a competitive advantage over the competition by adding value
throughout the process, and achieving it in the most effective, efficient and ethical way.
A Supply Chain Network: This is an evolution of the basic supply chain, which defines the more
complex structure, involving a higher level of interdependence and connectivity allowing a two-way
exchange of information and materials to successfully meet customer demands between more
organisations both upstream and downstream.
Tiering: The structured ordering and organisation of suppliers so that organisations downstream
work with fewer suppliers upstream.
Logistics: It is the process of planning, implementing, and controlling procedures for the efficient and
effective transportation and storage of goods, including services and related information, from the
point of origin to the point of consumption for the purpose of confirming to customer requirements.
Logistics require:
Demand planning
Fleet management
Inventory management
Warehousing and storage
Order fulfilment
Demand Planning: Demand planning is knowing what si required and when. It relates to
understanding of what products are coming from where and when, as well as knowing where they
need to go and by when.
Fleet management: It is a broad term covering the solutions an org uses to physically transport
goods from one place to another.
Inventory Management: It is knowing how much inventory (stock) is available at any point in time.
Warehousing: Laying warehouses in a way that makes product selection quick and easy to manage
inventory efficiently.
Order Fulfilment: Supplying an order successfully from warehouse till the customer.
Material Management: It is part of supply chain that concerns with the flow of materials to, from,
and inside manufacturing/production units. It covers the planning, handling, storage, inspection and
issuing of raw materials, components and finished goods.

Waste Management: It encompasses the strategies organisation use not only to dispose of waste but
also to reduce, recycle and prevent it form occurring in the first place.
Comparisons:

2 THE SUPPLY CHAIN FLOW

The supply chain moves from raw material extraction through to the end customer, with
value added at each stage:

Producers Suppliers obtain Materials sent to Distributor Customer

extract natural raw materials manufacturer; collects from
resources from producers manufacturer manufacturer
processes the and delivers to
materials the customer

Goods & services flow: left to right → (Upstream) | Information & payments flow: ←
right to left (Downstream)

Value in supply chain comes from effective management of the following:

 Price
 Delivery
 Storage
 Ethics
 Communication
 Environment
 Sustainability
 Quality
3 COMPARISON OF THE ROLE AND FUNCTION OF
SUPPLY CHAIN MANAGEMENT WITH PROCUREMENT
Procurement and Supply Chain Management are not the same thing, although they are
interlinked. There could be no supply chain without procurement.
Procurement is about obtaining products and services in response to a need, while supply
chain refers to the infrastructure involved in physically getting the products and services
delivered.

Procurement includes:
 preparing specifications
 monitoring quality
 sourcing
 buying
 stock control
 disposal of waste

4 INTERNAL AND EXTERNAL LOGISTICS

Internal logistics includes the processes that are related to turning the raw material into the
desired end product. These processes are:
 Extraction/production
 Manufacturing
 Warehousing/storage

External logistical processes include:

 Distribution
 Transport
 Retail
 1.2 Analyse the different sources of added value in procurement and supply

5 KEY DEFINITIONS

Conformance Specification: details exactly what the product or service will consist of. The supplier
will not necessarily be aware of what the product will be used for or how it will be used. Eg, Recipes
food or chemical formulae.
Performance Specification: outlines what a product or service is intended to do or achieve. This
covers its output requirements, tolerances and any functions it may have to perform.
Sourcing: It is the process of ensuring that the needs of your org are fulfilled by a suitable supplier
Aggregation of Spend: Combining multiple requirements in the org of the same material and making
it one big requirement for the supplier lets the procurement professional get better prices.
Obtaining Price Comparisons: RFQs obtained from various suppliers let the proc manager select the
best price possible for the org.
Incoterms: These are the shipping or delivery methods under which a supplier intends to supply
good to the buyer.
Whole Life Costing: An estimate used to help buyer determine the end to end cost of providing
service, manufacturing or procuring a product. Also known as Total Cost of Ownership (TCO) and Life
Cycle Cost (LCC).
Total Cost of Acquisition: It considers all cost of procuring a service or product but not running or
maintaining cost.
Total Cost of Ownership: It considers all cost of procuring including planning, tendering,
procurement, contract management, until termination but it does not consider benefits derived from
procurement.
Life Cycle Costing: It only considers total cost of construction, maintenance, and running cost but
does not include disposal/termination cost.
Whole Life Costing: This includes all elements of costing from planning till termination but also
includes other factors such as associated benefits and earnings derived from the service/product.
Whole Life Asset Management (WLAM): It is the process of evaluating the total price and all
associated cost of a product or service and making an informed decision as to which option will
provide the best value for the org.

6 KEY COMPARISONS
Advantages and disadvantages of performance and conformance specifications

Performance Specification Conformance Specification

Is simple to prepare, not long or detailed. Takes longer to prepare, long and complex
It is cheaper It is more expensive
Allows suppliers to innovate Does not allow suppliers to innovate
Allows supplier competition Limits suppliers competition

The five rights of procurement are:

 Right quantity – ensuring the most cost-effective amount of a product or a service is
procured. Wrong quantity can lead to:
o Production stoppage
o Retail consumers’ need could be unfulfilled
o Warehouse could be overstocked
o Price paid could be too high
 Right quality – It is an essential aspect to get value for money. (ISO 90001)
 Right time – Proc professional are required to make sure that orders are placed on
time and are delivered on time.
 Right place – Goods and services have to be delivered at the right place.
 Right price – The price of a product or service must be fair and reasonable

Procurement professionals have an opportunity to influence price in a number of ways:

1. Sourcing
2. Aggregation of Spend
3. Obtaining Price Comparisons
4. Negotiations
7 HIERARCHY
7.1 Compare the concepts of procurement and supply chain
management

[Link] Procurement (elements of procurement):

 Added value
 Cost
 Inventory
 Logistics
 Purchasing
 Quality
 Supply
 Waste Management

[Link] Supply Chain (stages in a supply chain)

 Producers extract natural resources(upstream supply chain)
 Suppliers obtain raw materials from producers (upstream supply chain)
 Materials are sent to manufacturers (downstream supply chain)
 Distributor collects material from manufacturers and delivers to customer(downstream
supply chain)
 Customer receives the product (downstream supply chain)

[Link] Supply Chain Management (factors that bring value):

 Price
 Delivery
 Storage
 Ethics
 Environment
 Sustainability
 Communication
 Quality

[Link] Supply Chain Networks (parties involved in Supply Chian network):

 External Suppliers
 Manufacturers
 Distributors/ wholesale centres
 Logistics
 Consumer demand

[Link] Supply Chain Network flows:

 Physical flow
 Information flow

[Link] Role of procurement:

 Preparing specifications
 Monitoring quality
 Sourcing
 Buying
 Stock control
 Disposal of Waste
[Link] Logistics (different types):
Internal logistics
 Extraction/production
 Warehousing/storage
 Manufacturing
External logistics
 Distribution
 Transport
 Retail

[Link] Logistics (areas to manage):

 Demand Planning
 Fleet management
 Inventory management
 Warehousing and storage
 Order fulfilment

[Link] Waste Management (Types):

 Open loop recycling
 Closed loop recycling

7.2 Analyse the different sources of added value in procurement and

supply

[Link] 5 rights of procurement:

 Right place
 Right time
 Right Quantity
 Right Quality
 Right price

[Link] Types of specification:

 Conformance
 Performance

[Link] Ways to influence right price:

 Sourcing
 Aggregation of spend
 Obtaining price comparisons
 Negotiation

[Link] Types of life cycle costs:

 Life cycle costs
 Whole life costing
 Total cost of ownership
 Total cost of acquisition

[Link] Other sources of added value (Types):

 Additional features
 Brand
 Convenience
 Excellence of service
 Market development
  Reduced input costs
 Reputation
 Innovation
 Sustainability

[Link]
Factors to consider while defining value for money:
 Currency/exchange rates
 Environmental factors
 Freight cost
 Maintenance costs
 Packaging
 Payment terms
 Place
 Product/service price
 Quality
 Quantity
 Supplier reputation
 Time
 Warranty
7.3 Describe the categories of spend that an organisation may
purchase

Definitions
Fixed cost: It does not change with the output of the org.
Variable Cost: It changes with the output of the org.
Direct Cost: Costs that are associated directly with the job or contract. Eg, direct cost of construction
of an office block will include bricks, cement and labour.
Indirect cost: These are not directly associated with a job or contract. Eg, rent of office, mobile phone
contracts etc.
Stock Procurement: Procurement of good which could be stocked/ placed in warehouse.
Non-stock procurement: procurement of those items that will not be stored as inventory
Direct procurement: Purchasing of large quantities of raw material at the best possible rates.
Without direct procurement there could be no finished product.
Indirect procurement: Purchasing services or tools that do not form the part of the final product but
are required to maintain business and production process.
Capital Purchase – An asset purchased to last a long period of time
Services Procurement – Procurement of activities or benefits from one party to another that does
not result into ownership of anything tangible.

[Link] Cost is made up of (apart from just money):

 Time
 Material
 Effort
 Opportunity

[Link] Breakdown of organisational costs:

 Capital purchases
 Insurance
 Marketing
 Raw material, components and consumables
  R&D
 Salaries/pensions
 Services
 Sundry items – stationary stuff
 Training
 Utilities
 Vehicle/transport

[Link] CIPS Procurement Cycle:

 Define business need
 Market analysis and make or buy decision
 Developing the strategy and plan
 Pre-procurement market testing
 Develop documentation and detailed specifications
 Supplier selection to participate in tender
 Issue tender documents
 Bid and tender evaluation and validation
 Contract award and implementation
 Warehouse, logistics and receipt
 Contract performance and improvement
 Supplier relationship management
 Asset management

[Link] Orgs have two types of budgets:

 Capital expenditure (CAPEX) also known as capital purchase – a purchase to last a long
period of time
 Operational expenditure (OPEX) – An ongoing expense to an organisation

[Link] Operational Expenditure includes:

 Rent
 Insurance
 Raw materials
 Transport
 Salary
[Link] Utility Procurement: refers to the procurement for the services required to support the
basic infrastructure of an org. Types:
 Electricity
 Gas
 Mains water
 Telephone
 Rent
 Transportation

7.4 Differentiate the stakeholders of procurement or supply chain

functions

Definitions
Stakeholders: Stakeholders are any individual or group of individuals that have an interest in or an
influence on an organisation.
Internal Stakeholders: Individuals or group of individuals who are directly involved with the business.
External Stakeholders: Individuals or group of individuals who have an interest in the business
Connected Stakeholders: External stakeholders who have financial interest (commercial tie) in the
business

[Link] Types of internal stakeholders:

 Colleagues with a need
 Account department
 Company owner
 Manufacturing department
 Stores department
 Quality department
 Sales department
 Transport fleet

[Link] Types of External stakeholders:

 Local community
 Producers
 Low tier suppliers
 Couriers and haulage companies
 Media
 Government and regulatory bodies
 CIPS

[Link] Types of connected stakeholders:

 Shareholders
 Tier 1 suppliers
 Banks
 Customers and consumers
 

7.5 End of Chapter Assessment

1 (a) Outline TWO differences between procurement and purchasing and supply.
(b) Describe FIVE advantages of implementing a supply chain management approach.
2 With reference to an organisation of your choice, describe THREE examples of direct
procurement costs and TWO examples of indirect procurement costs.
3 Describe FIVE situations where it would be appropriate to have a policy of ‘buying for
stock’.
4 Explain FIVE features of capital expenditure (‘CAPEX’) procurement which are not
applicable when buying operational expenditure (‘OPEX’) items.
5 Describe FIVE distinctive features of services and how each impacts on procurement
and supply.
6 (a) Taking each of the five rights in turn, outline how procurement can add value during
the procurement activity.
(b) Suggest ONE additional source of added value and outline how procurement can
have an impact on the source of added value selected.
7 (a) Explain the terms (i) supply chain management (ii) logistics (iii) materials
management.
(b) Define the term ‘supply chain network’. Explain the benefits of viewing the connections
between purchasers and suppliers in terms of a supply chain network.
8 (a) Define the term ‘stakeholder’.
(b) With reference to an appropriate model, describe the power and influence of FOUR
stakeholders of the procurement and supply function.