L4M6 Chapter 2

 

Processes in sourcing

For important items, organisations might categorise certain suppliers as:

• Approved: supplier satisfies basic criteria

• Preferred: supplier has good track record and user depts are allowed to order from them without further checking

For critical inputs, a more rigorous procurement process may need to be followed before invitation to tender.

Value for Money: this is a function of cost and quality. It involves satisfying the 3Es: Economy, effectiveness and efficiency.

Types of tendering:

• Open tendering: tender is open to any potential bidder

• Single-stage selective tendering: potential suppliers are pre-qualified and 3-10 suppliers are invited to submit tender.

• Restricted/two-stage open tender: partly pre-qualified as advertisement of the tender is restructured to certain technical journals, websites etc. The prospective suppliers are invited to compete.

Selective tendering is often used when the buyer has a choice.

A weighted-factor tendering system might be used to balance price and non-price criteria, and systematically score them. This involves developing selection criteria (factors) and weights for them.

Post-tender negotiation (PTN) might be used with the first-choice supplier, if flagged in the ITT, to potentially improve the supplier’s offer in dialogue.

Compulsory competitive bidding might be a feature of public sector procurements in order to ensure fairness and equality of supplier access.

Functional organisations

Organisations are often grouped into functions e.g. finance, procurement etc. For some purchases, procurement may form part of a cross-organisational team (COT) to collaborate.

• A matrix structure is one way of formalising cross-organisational working. It is dual authority (i.e. employees receive direction from functional and COT managers)

Practical stakeholder management

Contribution per unit of output: this is the selling price of a unit minus the variable cost of producing it. This must be enough to both cover the business’s fixed costs and make a profit.

• Modelling contribution will allow procurement to understand where the supplier’s breakeven point is.

In a long-term relationship, there might be transparent sharing of information in two ways:

• Open book costing: supplier shows its costs to the buyer, to prove that they are providing a reasonable price

• Cost transparency: both the buyer and supplier share their costs. This is more mutually beneficial and collaborative

Key principles for cost models:

• Understand the drivers of costs

• Be specific and simple

• Calculate TCO rather than just upfront price

Price elasticity of demand (PED): this is the degree to which demand is sensitive to a change in price. I.e. demand is elastic if it is more sensitive to a change in price.

• It is calculated by: % change in quantity demanded / % change in price

• If PED is elastic, supplier revenue rises as price falls. If PED is inelastic, revenue falls if price falls

Early supplier involvement (ESI): this is a way of leveraging supplier expertise and know-how earlier in the procurement process, for example when building specifications. There are 4 types of ESI:

• No involvement: supplier only provides feedback and price for buyer’s design

• White box: informal consultation

• Grey box: joint development activity

• Black box: supplier-driven development of the product

ESI should have a confidentiality clause since commercially sensitive information will be shared between the buyer and supplier. If it is particularly sensitive, an NDA should be appended as a schedule.

Use of KPIS: KPIs drive behaviours and change based on incentives. They can be based on cost, quality, time etc.

• For simple contracts, they could just be quantitative measures of numerical data e.g. target cost.

• Qualitative measures require more work: e.g. survey responses, communication etc

• If the buyer-supplier relationship is stronger, KPIs could be expanded from product-level to the relationship-level e.g. establishing shared goals, and measuring achievement of these

Purchaser-supplier satisfaction model (search this up for diagram)

·        Axes measure purchaser’s satisfaction and supplier’s satisfaction

·        There are 4 quadrants. In the bottom left, both parties are dissatisfied, and in the top right, both parties are satisfied

·        In bottom right and top left, one party is satisfied and the other dissatisfied

·        A 45 degree line from bottom left to top right is the line of stability. Moving along this line indicates equal movement for both parties. Staying on this line creates less pressure for change as both parties are equally satisfied

Risk management and continuity of supply

For bottleneck and strategic items under the Kraljic matrix, continuity of supply is important. Actions that procurement staff need to take include reviewing critical supply contracts for liability clauses and developing business continuity plans (BCPs).

• BCPs will set out alternative actions to be taken, other sources of supply etc

Risk management is how an organisation addresses risks to their activities and mitigates them. Risks to supply continuity can be identified through risk analysis exercises, monitoring risk events, engaging industry stakeholders etc.

Risk = Likelihood x Impact

A risk register would be maintained, outlining identified risks to supply continuity, risk owners and mitigation actions.

A popular risk management strategy is the 4 Ts:

• Tolerate

• Transfer risk

• Terminate the risk

• Treat the risk

Terminating relationships

Relationships could be terminated for intrinsic reasons (a change in circumstances within the relationship) or extrinsic reasons (reasons from the external macro or micro environment).

A relationship may first decline, and then be followed by terminal breakdown when continuing the relationship is no longer tenable or beneficial.

• If the relationship is moving towards termination, it would make sense to move from a partnership to a more arms-length relationship, as this withdraws valuable resources from an unprofitable relationship

• One could even move to an adversarial relationship to squeeze the last bit of profit out of the relationship

• Moving down the relationship spectrum is a responsible way of easing away from the relationship in a more manageable way for both parties

An exit strategy may need to be developed, with procurement staff understanding when the contract should be terminated, period of notice etc.

A fixed delivery contract expires upon the completion of the subject matter e.g. delivery of the goods. Payment is made and contract is finished.

A term contract expires on a set date. It is good practice to notify the supplier of the upcoming expiry and what the buyer will be doing next upon expiry.

• Contracts with no set end date will usually contain terms under which it can be terminated, and break clauses with notice periods

• Very few contracts have automatic renewal clauses (evergreen contracts)

A relationship could be terminated amicably or in a hostile manner.

• Amicable termination: terminated in line with existing contract, or under the terms of a new contract

• Hostile termination: e.g. a breach of contract or poor performance resulting in termination.

A contract could be terminated for:

• Poor performance of contractual obligations

• A party being liquidated or going bankrupt

• One party exercising the break clause in the contract

Legal advice is nearly always used when a contract is being terminated.

Alternative dispute resolution (ADR)

ADR is a quasi-legal way of resolving conflicts. There are many types of this:

• Consultation: causes of conflict are discussed, and the supplier gives their input upon the problem arising, or before it arises

• Conciliation: conflict discussions are facilitated by an impartial third party. The conciliator makes constructive suggestions only

• Negotiation: both parties discuss issues in a structured way and seek constructive compromise

• Mediation: this may follow conciliation if a voluntary settlement isn’t reached. An independent person is appointed as a mediator who will make a formal proposal / recommendation as a settlement to the dispute, but this is not binding

• Arbitration: this may follow unsuccessful mediation. Most contracts have an arbitration clause. An independent person provides a judgement that is binding on both parties

• Litigation: legal action over a dispute that is resolved in the courts. Legal fees are costly and may take a long time to resolve. The conflict details are also public, unlike the other ADR mechanisms which are in closed proceedings

Litigation is seen as last resort, and it’s common in contracts to stipulate that disputes first go to arbitration.

• Arbitration is the most commonly used form of ADR for international contracts because parties are in different legal jurisdictions. Avenues such as the ICC court of arbitration or UNCITRAL arbitration code may be used
• Arbitration and litigation tend to lead to win-lose solutions and are costly

·        ADR methods such as conciliation and meditation are increasingly popular for the above reasons.

Intellectual property rights (IPR)

There are different types of IPR:

• Patents: if an invention works, the inventory can register a patent to prevent others from using it for a set period of time, without permission

• Trademarks: a sign which is represented graphically and distinguishes a product from another. Trademarks can be registered

• Designs: design owners have design rights. These don’t have to be registered to be protected from others copying them

• Copyright: the right of an author to prevent others from copying their work. This doesn’t have to be registered: it is automatic

• Confidential information: a party may have a right to prevent another party from releasing its confidential information that it holds.

When a contract ends, IPR reverts back to its original state. However, jointly created IPR is more complicated, and should have been covered in contract terms.

• A confidentiality clause is generally included. An NDA is appended as a schedule if stricter confidentiality is needed

• The most important aspect of security following a termination is online security

·      Personal data that is processed by one party on behalf of another is covered by GDPR in the EU and the Data Protection Act 2018 in the UK.

• This requires the data controller and data processor to have a contract between them covering their GDPR responsibilities

• There are principles covering storage limitation (data should be kept only as long as necessary), processed with confidentiality and security, and have clear accountability for how it is processed

Termination may affect employment contracts of staff if an outsourced service involved staff moving from the buyer to the supplier. The UK’s TUPE Regulations perverse employees’ rights when a service provision change occurs.

• When employees are transferred to a new employer, they move under the same T&Cs

• The old employer has a duty to provide employee information to the new employer before the transfer occurs. This is called employee liability information

If a contract is terminated and supply is still required, the buyer needs to take steps to ensure continuity of supply. A COT might be set up, new suppliers may be engaged etc.

Supplier base rationalisation may involve fewer multi-source agreements, and more single-source agreements with closer buyer-supplier relationships. This, however, creates a reliance on particular suppliers.

Particular themes in an exit strategy include:

• Parallel running: supplies by both outgoing and incoming suppliers may occur in parallel for a transition period. This should be supported by all parties

• Quality / timeliness of supplies: the quality provided by the outgoing supplier should continue to meet the KPIs. The same goes for the incoming supplier

• Data should be shared from the outgoing supplier to the other parties

• Outgoing supplier’s personnel: the old supplier’s personnel should be maintained to meet the demand during transition. Service quality shouldn’t deteriorate when the contract is due to end