1.1: Business Needs
1.2: Costs and Prices
1.3: Criteria
1.4: Budgets
1.1:
developing a business case
What’s a business case? A justification for a project
based on articulating a benefit. It needs to consider various options, show how
it came to a preferred option and justify this.
· HMT
Green Book is the UK Government’s best practice for producing business cases,
based on a 5-case model
· The
Commercial Case under the 5-case model applies most to procurement
professionals.
RAQSCI
Model
This model demonstrates what an organisation needs from its procurements:
- Regulatory: be compliant
- Assurance of supply: a stable source and meets the requirement at the right time (now or later?)
- Quality: meet the requirement
- Service: meet service levels needed
- Cost: fit within cost envelope
- Innovation: does the item need to evolve?
This is in order: move from 1 -> 6.
Difference between wants and needs: wants are
nice-to-have, needs are musts.
3
types of purchase (recap of L4M1)
1.
Straight re-buy
- Buying something that has been bought before with no change.
2.
Modified re-buy
- Adapting the requirement and buying something that has been bought before.
3.
New purchase
- Hasn’t been bought before. It can range from low-value to high-value, but likelier to be high-value.
- You might be buying the lower-value stuff regularly, but only buy high-value things occasionally
- This is more complicated: you’d need to go through the entire procurement lifecycle
- Offers procurement staff more opportunities to introduce new procurement practices, such as proper market research
- The implications of the 3 types of purchases on RAQSCI are intuitive, but might be worth testing yourself.
Capital procurements
This type of asset will be the most long-term, and therefore
you’ll need to take a whole-life view.
·
This imposes a lot of work when writing a
business case, to evaluate the through-life benefits and costs
Note: also bear in mind the 5 Rights and Kraljic
matrix (covered in previous modules) as frameworks for considering business
needs.
Writing
a business case
A business case is used to articulate the benefits when
weighed against costs, but also to encourage projects to be structured in a
rigorous way, with the best option chosen.
- The Management Case in the 5-Case Model (HMT Green Book) is meant to be set out how the project will be governed and measured.
- This is then taken forward when going into delivery, and reviewed to see if the project is successful (benefits management)
The size of the project will determine whether the E2E business case needs to be followed (for example, smaller projects can combine the OBC and FBC stages of a business case under HMT Green Book).
- Large projects might need a project feasibility study before commencing the business case process
What sort of benefits can you expect from a business case?
- Higher profit
- Reduced costs
- Higher quality service offering (this is an end in and of itself in the public sector)
- Greater market share
- Better brand
- Etc…
Added value = simply put, the markup a company charges its customers is its added value. I.e. customers are willing to pay more than the costs to the company for something, because they derive value from it.
- How can procurement add value? Cutting costs without affecting service delivery, or by acquiring higher quality services
(The Economic Case in the 5-Case Model will do cost-benefit analysis). Some costs and benefits are easy to quantify, whereas others are less so. Public goods, for example, are difficult (e.g. benefits to air quality etc).
- For a capital asset, benefits and costs would be through-life as well, which can be difficult to estimate
A business case might have a stated aim, and will consider the different approaches to get there.
- These will be different options, weighed up in an options analysis exercise
- From a procurement perspective, options might vary depending on the various routes to market, the contract award method etc
A business case needs to meet the strategic objectives.
- Each option in the options analysis will be weighed against SMART objectives
- If an option does not meet a SMART objective, it is rejected
What is sustainable procurement? Procuring in a way that that meets your needs through-life, but also benefits wider society.
- Remember ‘People, planet, profit’
- Translates to social, environmental and economic sustainability
- This isn’t just a ‘nice thing to do’: it benefits businesses reputationally, helps them attract ethical consumers and be compliant with regulations
It’s intuitive where procurement would be involved in the business case process (chiefly the Commercial Case in the 5-Case Model, but will feed into other parts too).
- But it’s important to have a RACI Model to manage the development of the business case
- ‘Responsible, Accountable, Consulted and Informed'
- These are mutually exclusive generally, apart from ‘responsible’ and ‘accountable’ which could apply to the same person
- Assigns responsibilities for various tasks
- This is important for business cases because multiple stakeholders will feed in
1.2: Estimating costs and prices
Price is the supplier’s charge for something. Cost is how much a buyer will spend on something.
- Costs for something may include more than just the direct fee paid to the supplier: there might be support costs, or logistics costs for example
Primary data is data collected directly by yourself, likely through field research. Secondary data comes second-hand, likely through desktop research.
- Primary data sources in procurement might be through RFIs, searching past contracts, asking suppliers
- Secondary data sources might come from market research firms, or large index datasets
Procurement staff could try and ask for open book costing,
where the supplier is transparent about their costs and profit. Cost
transparency is where both sides share their costs. These are quite rare.
Main types of cost: Materials, labour and overheads / other expenses
- Other expenses can cover a lot of categories (likely a lot of indirect costs)
- Capital procurements are considered fixed assets, not included in these categories
- Costs can alternatively be split by function as well
- Another popular way is direct costs versus indirect costs
- Best way of understanding direct costs: if you didn’t produce a good, the activities that you’d completely be able to remove as a result, are direct costs
- Another way is fixed versus variable costs (intuitive)
- These don’t always map cleanly to indirect and direct costs, so don’t confuse them as interchangeable
Suppliers price in two main ways:
- Cost-based pricing: a markup on their costs
- Market / demand-based pricing: price is determined more based on an analysis on the market
When estimating costs for a business case…
- Consider all of the direct costs first
- You’ll inevitably need to consider some indirect costs, but these might be harder to calculate.
a.
For example, for support functions like HR and
finance, how much cost should you take for the upkeep of these functions?
b.
You might make a general assumption for a % of
the direct cost to be added on top as indirects
Both sides might set target prices / target costs for a transaction, which can be negotiated.
Total-cost of Ownership (TCO)
This is particularly important for long-term procurements,
such as capital assets. It includes the cost of upfront procurement, support
and through to disposal.
The price / cost iceberg is a useful concept: it says
that the upfront price is only the tip of the iceberg, under which there are
many through-life costs.
Whole-life asset management / through-life costing (many
variations of this phrase basically): this is the process of evaluating all of
the through-life costs associated with an asset.
‘The time value of money’: currency in the future will be worth less than it is today due to inflation.
- When we do through-life costing, both through-life benefits and costs need to account for this depreciation of currency
- So how do we measure the through-life costs of a project today?
- This type of conversion into today’s money is called discounted cashflow (DCF)
1.3: Developing a business case
This section looks at various criteria that can be applied in
business cases.
Costs
- There could be a lower cost with procuring from a new supplier (either upfront or whole-life cost)
- A make or buy analysis might show the need to outsource provision
- However, lower costs might mean lower quality, so this will need to be considered
- The business case also needs to consider how reliable cost data is
Benefits
- Benefits can be financial and non-financial (the latter is more common in the public sector)
- A business case will consider the cost-benefit analysis of each option
- In this, risk factors may be applied where outcomes could be wide-ranging
Time
- Time is also an assessment factor: does the item need to be procured for immediate use?
- What are the procurement timelines for each option? Are some options prone to delay?
Ultimately, a business case
has to demonstrate that it meets organisational needs. Specifications
translate organisational needs into what the product has to do
Benchmarking could help demonstrate why a particular option is preferred.
- It compares your organisation against industry best practice
- Each option in a business case may need to meet a certain industry benchmark of performance
- There are different types of benchmarking:
- Internal: comparing within the organisation
- Competitor: comparing against top competitors
- Functional: comparing functions, such as the finance function, across different organisations (that aren’t competitors)
- Generic: comparing more generally outside of the types above
1.4: Financial budgets and
purchasing
Financial modelling is where you build a quantitative model based on a potential financial situation. In this, you might:
- Create ‘what-if’ scenarios
- Generate a cost model, with assumptions around future prices
Annual budgets are generally broken down into ‘control periods’. Budgetary control is how the budget is used to control the finances of an organisation.
- Budgetary control will include things like in-year forecasting, frequent reporting and identifying the variances
- There will be a budgetary control report at the end of each control period, showing variances where they apply
- Budgets for different departments feed into one another
- For example, revenue budget -> production budget -> direct procurement budget etc
·
Things might be paid for, and recorded in the
accounting system, at different times. Measuring the when things are paid for, is important, so that
the organisation has an understanding of its cash position. This is called a
‘cash budget’
Functional budgets are the budgets of running each function in an organisation. There are different ways of doing this:
- Incremental budgets: start with last year’s actual costs, and adjust
- Zero-based budgets: start from scratch (e.g. the bottom of this article talks about the Starmer Government’s zero-based budgeting approach as a way of cutting costs)
Fixed and flexible budgets: the formal budget at the start of a Financial Year (FY) is the fixed budget.
- This will be based on certain assumptions around the number of sales, for example
- This isn’t set in stone, as things change
- The flexible budget translates the fixed budget to account for what has actually happened in the period (i.e. based on the number of sales we’ve had, what should the budget be?)
No comments:
Post a Comment