Page 43 Chapter 4 TABLE 10: SAMPLE OF PROCUREMENT NEGOTIATION CHECKLIST TABLE 9: PROCUREMENT NEGOTIATION (A PREPARATION CHECKLIST)
Page 44 Chapter 4 TABLE 11: SAMPLE OF PROCUREMENT NEGOTIATION CHECKLIST SUMMARY
Page 45 Chapter 4 Exercise 13 1. Define negotiation (4 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 2. Explain THREE (3) situations in which negotiations should be used. (9 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________
Page 46 Chapter 4 Answer 13 1. Define negotiation (4 marks) Answer The term negotiation refers to a strategic discussion intended to resolve an issue in a way that both parties find acceptable. Negotiations involve give and take, which means one or both parties will usually need to make some concessions. Negotiation can take place between buyers and sellers, employers and prospective employees, two or more governments, and other parties. Here is how negotiation works and advice for negotiating successfully. 2. Explain THREE (3) situations in which negotiations should be used. (9 marks) Answer 1. Practice and build good habits. The first aspect of becoming a good negotiator is to develop and practice good habits. This includes learning more about techniques and best practices that can help improve your skills, whether it’s formal training or reading about new tactics. You’d be surprised how few people actually do this, and it can lead to a lack of confidence in negotiating skills. Running through hypotheticals and different situations can help improve your skills and anticipate solutions. Again, while there are people who are skilled negotiators naturally, many people need training to be truly successful.
Page 47 Chapter 4 Answer 13 2. Explain THREE (3) situations in which negotiations should be used. (9 marks) Answer 2. Organize a successful negotiation strategy. When thinking about a specific negotiation, it’s important to organize a successful strategy before the negotiation begins. This involves planning for specific scenarios and understanding the other party. Each person in the negotiation will have a specific range of acceptable outcomes. This is their ZOPA, or zone of possible agreement. Not only is it important for the parties to understand their own ZOPA, but it is also important to understand the ZOPA of the opposing party. Doing so will allow you to determine if there is a positive or negative ZOPA, which will determine whether or not the parties will be able to settle. Preparing for all scenarios can help set you up for success. 3. Work through the issues methodically. This is the working part of the negotiation. Here, the parties are evaluating what the other party’s ZOPA is and whether or not they line up with their own ideas. They will also need to start weighing whether the possibilities are better than their best alternative to a negotiated agreement. If a party can get a better deal somewhere else, they will likely leave the room. Understanding when this is the case is important. It’s important to weigh the alternatives and know whether an agreement is truly the best choice. If multiple issues need to be addressed or multiple interests lie within the situation, it can be helpful to develop a plan for how to deal with each issue methodically.
Page 48 Chapter 4 Discussion Questions: 1. What are the FOUR (4) alternative ways of establishing negotiation agreements? 2. Discuss the THREE (3) distinct phases of negotiation. 3. Discuss negotiation strategies / outcomes. 4. Describe procurement negotiation (a preparation checklist)
Page 49 Chapter 4 Answer 1. What are the FOUR (4) alternative ways of establishing negotiation agreements? Answer a. Develop a standard template contract: Begin by creating a standard template contract that covers the key provisions typically encountered in your organization’s commercial agreements. This template should reflect your company’s preferred positions on various issues and serve as a starting point for negotiations. b. Understand the negotiating parties: Contract negotiations exist in nearly all teams within an organization. By tailoring a playbook to a specific negotiation team or target audience in your organization, you can optimize the content, style, and goals of the playbook. c. Draft the playbook: Collaborate with your legal team and applicable business negotiators to develop the playbook, ensuring it provides clear explanations, legal risk assessments, and pre-approved fallback alternatives for either each provision in the template contract or provisions that are likely to be the subject of negotiations. d. Train your negotiators: Provide training sessions for your negotiation team, focusing on the content of the playbook and the importance of adhering to its guidelines. Make sure the negotiators understand how to handle the playbook and that the playbook is a confidential internal tool that should not be shared outside the organization. Encourage open communication between negotiators and the legal team to address any questions or concerns. Consider incorporating annual or quarterly training opportunities to refresh and reset negotiation expectations.
Page 50 Chapter 4 Answer 2. Discuss the THREE (3) distinct phases of negotiation. Answer a. Preparation Before negotiations begin, there are a few questions it helps to ask yourself. Those include: What do you hope to gain, ideally? What are your realistic expectations? What compromises are you willing to make? What happens if you don't reach your end goal? Preparation can also include finding out as much as you can about the other party and their likely point of view. In the case of the SUV negotiation above, you could probably find out how much room the dealer has to bargain by looking up actual sales prices for that vehicle online. Also, marshal any facts that will help you make a persuasive case. If you're negotiating for a new job or a raise at work, for instance, come armed with concrete examples of your accomplishments, including hard numbers if possible. Consider bringing testimonials from satisfied clients and/or coworkers if that will buttress your case. Many experienced negotiators consider preparation to be the single most important step in the entire process. b. Exchanging Information Once you're prepped for the negotiation, you're ready to sit down with the other party. If they're smart, they have probably prepared themselves, as well. This is the point at which both sides will present their initial positions in terms of what they want and are willing to give in return. Being able to clearly articulate your wishes is critical to the negotiation process. You may not get everything on your wish list, but the other party, if they want to reach a deal, will have a better idea of what it might take to make that happen. You will have a better idea of their position, and where they might be willing to bend, as well. c. Bargaining Now that both parties have laid out their case, you're ready to start bargaining. An important key to this step is to hear the other party out and refrain from being dismissive or argumentative. Successful negotiating involves a little give and take on both sides, and an adversarial relationship is likely to be less effective than a collegial one. Also bear in mind that a negotiation can take time, so try not to rush the process or allow yourself to be rushed.
Page 51 Chapter 4 Answer 3. Discuss negotiation strategies / outcomes. Answer a. Practice and build good habits. The first aspect of becoming a good negotiator is to develop and practice good habits. This includes learning more about techniques and best practices that can help improve your skills, whether it’s formal training or reading about new tactics. You’d be surprised how few people actually do this, and it can lead to a lack of confidence in negotiating skills. Running through hypotheticals and different situations can help improve your skills and anticipate solutions. Again, while there are people who are skilled negotiators naturally, many people need training to be truly successful. b. Organize a successful negotiation strategy. When thinking about a specific negotiation, it’s important to organize a successful strategy before the negotiation begins. This involves planning for specific scenarios and understanding the other party. Each person in the negotiation will have a specific range of acceptable outcomes. This is their ZOPA, or zone of possible agreement. Not only is it important for the parties to understand their own ZOPA, but it is also important to understand the ZOPA of the opposing party. Doing so will allow you to determine if there is a positive or negative ZOPA, which will determine whether or not the parties will be able to settle. Preparing for all scenarios can help set you up for success. c. Work through the issues methodically. This is the working part of the negotiation. Here, the parties are evaluating what the other party’s ZOPA is and whether or not they line up with their own ideas. They will also need to start weighing whether the possibilities are better than their best alternative to a negotiated agreement. If a party can get a better deal somewhere else, they will likely leave the room. Understanding when this is the case is important. It’s important to weigh the alternatives and know whether an agreement is truly the best choice. If multiple issues need to be addressed or multiple interests lie within the situation, it can be helpful to develop a plan for how to deal with each issue methodically. d. Expand options for success. Separating issues and interests may not always be the best option. In addition to working through individual offers and making concessions to move each other closer to an agreement, a valuable skill of a great mediator is the ability to enhance any proposal by expanding the options available for settlement. This means carefully considering the interests or special considerations that are driving the demands of the other party. By identifying these interests in advance, you can strategically add value to the negotiation without adding more money. This is called integrative bargaining, and it can help to create a solution where everyone is happy and feels confident in their agreement. e. Record the finalized agreement. The final key step in negotiating is recording everything in a written agreement. This is crucial to ensuring that the agreement is followed and that everyone agrees on the specifics. The parties will rely on the recorded agreement moving forward, whether it is through a continuing relationship or not. Establishing successful methods for resolving negotiations will help parties walk away feeling confident in their agreement and may even look forward to continuing to work together down the road. By working through these steps, even the most novice of negotiators can achieve effective results in future negotiations to come.
Page 52 Chapter 4 Answer 4. Describe procurement negotiation (a preparation checklist) Answer Negotiation – Checklist: Allow plenty of time to prepare for an upcoming negotiation. Meet with relevant stakeholders to understand business objectives and preferred outcomes. Set targets, including must-haves and nice-to-haves. Understand your red line, or when you will walk away from a negotiation. Research the other party as thoroughly as possible to understand and prepare for their negotiating position.
Chapter 5 Pricing Determination After reading this chapter, you should be able to: Discuss the foundation concepts of price determination - Interpret the concept of managing bid - Clarify the elements of competitive bidding - Clarify price analysis techniques - Clarify price determination Page 53
MANAGING BIDS & NEGOTIATING PRICES What is Managing a Bid? Ideally you will want your pick of several qualified suppliers, and the best method to determine if an offer is competitive is to request a bid. Bidding will allow you to verify that the pricing provided by the supplier is competitive. It’s appropriate to advise the supplier when you are seeking competition, delineate your expectations of the supplier as well as identifying the supplier’s expectations of WHOI. Once you have identified all of the variables, they are used to form a legally binding contract. The bidding process has 5 steps that begin with the development of a set of specifications or objectives. Sometimes a collaborative approach to identifying specifications is helpful. There are a number of resources available to engage that include colleagues, trade manuals, the Procurement Team, and the suppliers themselves. Try to create your specifications with sufficient latitude to engage the suppliers in a way that leverages their expertise.You may ultimately find that the best solution is revealed and better suits your needs. Five Steps to the Bidding process ·Specifications ·Request for Bids ·Bidding ·Reviewing the Bids ·Award of the Contract Here are some tips on preparing a bid: Allow sufficient time to prepare and evaluate the bid. All suppliers should receive identical copies of your bid documents and any subsequent changes. Page 54 Chapter 5
Whenever practical, every effort should be made to include our internal shops and departments in the bidding process. Specify a deadline for receipt of bids. If the bid is quite complicated it may generate a host of questions or require a site visit from the suppliers before they can bid. Make sure the person who is submitting the response is appropriate. All bids are confidential and should not be used as a bargaining tool among suppliers. The suppliers will need sufficient time to respond (usually two to four weeks depending on the complexity). If you extend this deadline for one, you must extend it for all. It may be most expedient to hold a pre-bid meeting with all parties present. All bids should be signed by an officer of the supplier's company with authority to commit the company's resources. This is called bidding collusion and it ruins the bid process. Once bids are received, you need to evaluate them in a fair and open process. While the procuring of goods and services at the Institution does not require the lowest bid, it is required to document when a lower bid was not accepted (see Single or Sole Source justification section of this Guide). Some tips on evaluating bids include: Take the time to review the bids carefully. Narrow the field by determining which vendors are responsive. A responsive bid will include ALL the information needed to procure the product or service up front. Look carefully at the proposed prices. Be wary of suppliers who substantially underbid others. It might mean the supplier misunderstood the requirements or is low balling the bid. In this case, the product or service might suffer. Consider the supplier's past performance, after sale support and services, technology and other criteria that might separate one supplier from another. Always compare TOTAL acquisition and life cycle cost. This includes shipping, consumable supplies, service agreements, potential repair parts and other after purchase costs. Page 55 Chapter 5
Negotiating a Price There are times when the bid process cannot be used. When this occurs, prices must be negotiated. Negotiation should be used when: The purchase involves a significant amount of money or requires an ongoing effort. In these situations, negotiation may be used in conjunction with a bid. The number of suppliers available is too limited to create competition via a bid. New technologies or processes are required for which a selling price has yet to be determined. The supplier is required to make a substantial financial investment or other resources. There is not enough time available to seek competitive bids. When negotiating a price, it is important to consider all of the opportunities that exist. Find out as much as possible about the company. Be sure you understand your requirements fully and how these might affect prices. Investigate the costs associated with providing the service or materials you are requiring. Develop your own strategy for the negotiation and try to anticipate the strategy of the supplier. Make sure the person you are negotiating with has the authority to make offers and commit the supplier. Finally, remember that a successful negotiation is a win-win for both parties. You must allow the supplier enough leeway to make supplying the goods or services attractive. Page 56 Chapter 5
When we discussed buyer behavior, we identified the stages that organizations go through to make a purchase decision. When it comes to pricing consideration, two of these stages are especially relevant: proposal solicitation and supplier selection. You will remember that during the proposal solicitation stage of the process, qualified suppliers are invited to submit proposals. Those vendors will each craft a detailed proposal outlining what the provider can offer to address the buyer’s needs, along with product specifications, timing, and pricing. These proposals are submitted to the buying organization, which will review them during the supplier-selection stage of the process. Page 57 Chapter 5 Competitive Bidding FIGURE 10: COMPETITIVE BIDDING
During this stage the buyer completes a thorough review of the proposals submitted, scores the proposals, and often narrows down the list of vendors to the highest-scoring proposals. This short list is marked for “further negotiation, ” which may include negotiating product quantity, specifications, pricing, timing, delivery, and other terms of sale. This process is called a competitive bid process. A competitive bid is a procurement process in which bids from competing suppliers are solicited. The competitive bid process generally advertises the requirements and specifications of solutions and invites suppliers to provide a proposal about how they will meet the need and at what price. Together, the steps of requesting proposals from multiple vendors, evaluating the proposals by comparing them against one another, and negotiating the terms constitute a competitive bid process. Let’s consider a very simple example of the differences between the competitive pricing for a B2C sale and a competitive bid in a B2B sale. Imagine that you are traveling to Chicago and you want to find a low-cost hotel room. There are a number of Web sites that allow you to compare costs of different hotels. You are able to select the location and dates for your stay, compare information about the available hotels, and see the price for each option. This enables you, as a buyer, to select and reserve your room without ever having direct contact with the hotel. If you are planning to hold a large conference at a hotel in Chicago, then the process if very different. The meeting planner will generally do some research to identify all of the hotels in the area that have facilities with sufficient capacity to accommodate the conference. Then the planner will issue a request for proposals (RFP) to all of the possible venues. The RFP will provide information to the hotel about the conference needs: number of expected attendees, meeting space required, hotel rooms required, and any special requirements (such as catering, etc.). Each of the hotels has the opportunity to craft and submit a proposal. The hotels have a good sense of what their competitors offer, so Page 58 Chapter 5
they will describe what is unique about their facilities and available services. They will also price their proposal according to how confident they are that their facilities and services can support the value. Unlike the consumer, the business will be offered a full, customized package with pricing that will include a hotel room rate for a defined block of rooms, a minimum dollar amount that must be spent on food and beverages, and pricing for other items. If the food-and-beverage expense is high, then the hotel might waive the cost of meeting-space rental. Once the business has reviewed the proposals, it might negotiate on any of these terms or ask to have some of the services that will incur a fee, such as Internet access, included in the package. The competitive bid process creates an opportunity to tailor pricing for a specific customer’s needs, based on the value is provided relative to a specific set of competitors. •Price Analysis Techniques -With any purchase of goods or services, including sole source items, some type of cost analysis is required. A part of this analysis is verification of pricing. There are many ways to analyze the pricing of a product or service. Techniques for comparing price can be found in the Federal Acquisition Regulation (the FAR). Some of the techniques recommended include: Comparison of Competitive Bids How does its functions? Obviously, this is one of the best means for validating price. By asking three or more suppliers of their prices for the same product, we can determine if a particular price is Page 59 Chapter 5
reasonable. However, this does not preclude total cost analysis. The lowest bid may not always represent the lowest cost. The total cost of acquisition must be analyzed. There may be cost associated with making the lower cost product perform to standards, the additional cost of early replacement or the cost of redesign and/or testing required to make the lower cost product applicable. This "total cost of acquisition" is the real cost that must be compared. A brief statement as to why a particular quotation is selected is required. Comparison of Prior Quotations In some circumstances, it may be most effective to compare recent (with the past 24 months) quotations for the same product or service to determine the viability of the current quotation. This is particularly helpful when timing of the acquisition is critical and solicitation of the competitive quotes would delay the procurement. An explanation of why comparison of prior quotations was used must accompany this procedure. Comparison of Published Price List This method should only be used for materials that are sufficiently similar to items or services are available to the general public and whose price would appear in a published price list. However, when comparing these price lists, it is important to consider standard industry discounts for the items or services. As an example, most electrical supply houses will offer standard discounts to purchasers doing a particular dollar or quantity volume. Such discounts must be considered when comparing list prices and noted in the procurement documentation. Prices Set by Law or Regulation Sometimes, prices are set by a law or regulation. When this occurs, there is usually a "pronouncement" of some form type that references the pricing structure. This must be referenced when procuring such items. Page 60 Chapter 5
Similar Item Comparison When an item or service is fairly unique, it is possible to compare items that are similar to those being purchased. A statement as to why the common item will not meet the specification should accompany the price comparison. Rough Yardstick Comparisons This technique uses a rough comparison between like items based on measurable similarities such as price per pound, cost per horsepower or price per test sample. Again, an explanation of the similarities must accompany this analysis. Many times, it is difficult to find comparable items or services. In these situations, it may be necessary to rely on a technical analysis. While time consuming, this is the best method to use when validating price for complicated sole source items. In this analysis, the supplier of the goods or services is asked to provide: List of materials and their cost ü Number and kinds of labor hours required. üAny special tooling and facilities proposed. üA reasonable plan for use and disposal of scrap. üAny other cost, including profit, relevant to the cost of providing the service or item. üEach item on the supplier's bill of materials is then analyzed using the above noted techniques. Negotiation of variables such as overhead and profit can occur as well. Again the exercise must be documented. In all price and cost analysis, time is required. We recommend beginning the process as early as possible, even if funding has not yet been guaranteed. In all circumstances, the Procurement staff will be happy to assist. Page 61 Chapter 5 SUMMARY
Page 62 Chapter 5 Exercise 10 1. What is managing a bid? (5 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 2. Identify FIVE (5) steps to the bidding process. (5 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________
Page 63 Chapter 5 Answer 10 1. What is managing a bid? (5 marks) Answer Bidding will allow you to verify that the pricing provided by the supplier is competitive. It’s appropriate to advise the supplier when you are seeking competition, delineate your expectations of the supplier as well as identifying the supplier’s expectations of WHOI. Once you have identified all of the variables, they are used to form a legally binding contract. 2. Identify FIVE (5) steps to the bidding process. (5 marks) Answer: • Specifications • Request for Bids • Bidding • Reviewing the Bids • Award of the Contract
Page 64 Chapter 5 Discussion Questions: 1. There are many ways to analyze the price of a product or service when purchase goods and services. The procurement personals are expected to make the purchasing decision price and apply the best business practices. Terdapat banyak cara untuk menganalisis harga produk dan perkhidmatan apabila membeli barangan dan perkhidmatan. Personal perolehan dijangka membuat keputusan harga pembelian dan mempraktikkan amalan perniagaan terbaik (a) Complete the following purchasing decision prices in procurement. Lengkapkan keputusan harga pembelian dalam perolehan i. Bid management Pengurusan bid (10 marks) ii. Bid negotiation Perundingan bid (10 marks) (b) Interpret negotiation price in procurement. ( 5 marks)
Page 65 Chapter 5 Answer: 1. There are many ways to analyze the price of a product or service when purchase goods and services. The procurement personals are expected to make the purchasing decision price and apply the best business practices. Terdapat banyak cara untuk menganalisis harga produk dan perkhidmatan apabila membeli barangan dan perkhidmatan. Personal perolehan dijangka membuat keputusan harga pembelian dan mempraktikkan amalan perniagaan terbaik (a) Complete the following purchasing decision prices in procurement. Lengkapkan keputusan harga pembelian dalam perolehan i. Bid management Pengurusan bid (10 marks) Answer Allow sufficient time to prepare and evaluate the bid. All suppliers should receive identical copies of your bid documents and any subsequent changes. Whenever practical, every effort should be made to include our internal shops and departments in the bidding process. Specify a deadline for receipt of bids. If the bid is quite complicated it may generate a host of questions or require a site visit from the suppliers before they can bid. Make sure the person who is submitting the response is appropriate. All bids are confidential and should not be used as a bargaining tool among suppliers. The suppliers will need sufficient time to respond (usually two to four weeks depending on the complexity). If you extend this deadline for one, you must extend it for all. It may be most expedient to hold a pre-bid meeting with all parties present. All bids should be signed by an officer of the supplier's company with authority to commit the company's resources. This is called bidding collusion and it ruins the bid process. Once bids are received, you need to evaluate them in a fair and open process. While the procuring of goods and services at the Institution does not require the lowest bid, it is required to document when a lower bid was not accepted (see Single or Sole Source justification section of this Guide). Some tips on evaluating bids include: Take the time to review the bids carefully. Narrow the field by determining which vendors are responsive. A responsive bid will include ALL the information needed to procure the product or service up front. Look carefully at the proposed prices. Be wary of suppliers who substantially underbid others. It might mean the supplier misunderstood the requirements or is low balling the bid. In this case, the product or service might suffer. Consider the supplier's past performance, after sale support and services, technology and other criteria that might separate one supplier from another. Always compare TOTAL acquisition and life cycle cost. This includes shipping, consumable supplies, service agreements, potential repair parts and other after purchase costs.
Page 66 Chapter 5 Answer: ii. Bid negotiation Perundingan bid (10 marks) Answer Negotiating a Price There are times when the bid process cannot be used. When this occurs, prices must be negotiated. Negotiation should be used when: The purchase involves a significant amount of money or requires an ongoing effort. In these situations, negotiation may be used in conjunction with a bid. The number of suppliers available is too limited to create competition via a bid. New technologies or processes are required for which a selling price has yet to be determined. The supplier is required to make a substantial financial investment or other resources. There is not enough time available to seek competitive bids. When negotiating a price, it is important to consider all of the opportunities that exist. Find out as much as possible about the company. Be sure you understand your requirements fully and how these might affect prices. Investigate the costs associated with providing the service or materials you are requiring. Develop your own strategy for the negotiation and try to anticipate the strategy of the supplier. Make sure the person you are negotiating with has the authority to make offers and commit the supplier. Finally, remember that a successful negotiation is a win-win for both parties. You must allow the supplier enough leeway to make supplying the goods or services attractive.
Page 67 Chapter 5 Answer: (b) Interpret negotiation price in procurement. ( 5 marks) Answer 1.Comparison of Competitive Bids This is one of the best means for validating price. By asking three or more suppliers of their prices for the same product, we can determine if a particular price is reasonable. However, this does not preclude total cost analysis. The lowest bid may not always represent the lowest cost. The total cost of acquisition must be analyzed. There may be cost associated with making the lower cost product perform to standards, the additional cost of early replacement or the cost of redesign and/or testing required to make the lower cost product applicable. This "total cost of acquisition" is the real cost that must be compared. A brief statement as to why a particular quotation is selected is required. 2.Comparison of Prior Quotations In some circumstances, it may be most effective to compare recent (with the past 24 months) quotations for the same product or service to determine the viability of the current quotation. This is particularly helpful when timing of the acquisition is critical and solicitation of the competitive quotes would delay the procurement. An explanation of why comparison of prior quotations was used must accompany this procedure. 3.Comparison of Published Price List This method should only be used for materials that are sufficiently similar to items or services are available to the general public and whose price would appear in a published price list. However, when comparing these price lists, it is important to consider standard industry discounts for the items or services. As an example, most electrical supply houses will offer standard discounts to purchasers doing a particular dollar or quantity volume. Such discounts must be considered when comparing list prices and noted in the procurement documentation. 4.Prices Set by Law or Regulation Sometimes, prices are set by a law or regulation. When this occurs, there is usually a "pronouncement" of some form type that references the pricing structure. This must be referenced when procuring such items. 5.Similar Item Comparison When an item or service is fairly unique, it is possible to compare items that are similar to those being purchased. A statement as to why the common item will not meet the specification should accompany the price comparison. Rough Yardstick Comparisons This technique uses a rough comparison between like items based on measurable similarities such as price per pound, cost per horsepower or price per test sample. Again, an explanation of the similarities must accompany this analysis. Many times, it is difficult to find comparable items or services. In these situations, it may be necessary to rely on a technical analysis. While time consuming, this is the best method to use when validating price for complicated sole source items.
Chapter 6 Managing Quality After reading this chapter, you should be able to: Discuss the concepts in managing quality - Organize the important of managing quality in procurement - Adhere quality in the purchasing Page 68
What Is quality management in procurement ? Quality is an important part of the supply chain. It is quality inspections during the manufacturing process, quality checks before goods arrive at the customer, or checking the quality as raw materials and parts enter the factory. The quality of finished goods and services is dependent upon the quality of the materials and components used . Before any part or raw material is used in a manufacturer of a finished good that will be delivered to a customer, it is the responsibility of the purchasing department to ensure that the materials that arrive are of the correct quality specification. QUALITY IN THE PURCHASING PROCESS When the purchasing department is looking at the procurement of materials from suppliers, they will have been given some guidance by the manufacturing department, research, and development, or the quality department. This should include a variety of information about the item to be sourced, such as: Physical description Dimensional measurements Chemical composition Performance specifications Industrial standards Brand name CONCEPT AND DEFINITIONS Chapter 6 Page 69
No Quality in the Purchasing Process Explanation 1. Physical Description The purchasing department must know the physical attributes of the part they are required to source. For example, if the required material must be made of a certain shade of a blue, then the purchasing department must be able to communicate that requirement to the potential suppliers to ensure that the specification can be met. 2. Dimensional measurements For a part to be used in the manufacturer of a machine the part must conform to certain dimensional specifications. For example, if the manufacture of a finished item required the use of a Pentalobe TS1 screw with a length of 4mm, then the supplier must be able to produce the item in that correct size. 3. Chemical compositions This is very important for sourced materials that are used in the chemical process. The quality department should give the purchasing team a detailed list of chemical specifications of the required material. This should include a list of characteristics and specifications that the materials should conform to, as well as the ranges that the materials must lie within. For example, a sourced chemical may be required to have a pH of between 5.6 and 5.9; otherwise, the material would not be suitable for the manufacturing processes. 4. Performance specifications If a part is required to withstand certain forces or perform in a particular manner, the purchasing department must find a supplier that can achieve those specifications. For example, on a household item such as a washing machine, the rubber belt that is used must be able to withstand certain forces and not fail within a certain number of revolutions. This quality measurement is key for a business if they are to produce finished goods that are reliable in the eyes of their customers. Therefore, it is important for the purchasing department to find suppliers who can provide parts that meet quality specifications. 5. Industrial standards Some parts required for the production of finished goods must conform to certain industry standards. These standards are set by a number of trade or industry groups who try to maintain a certain level of quality. By having an item that conforms to a particular industry standard, the customer will have a level of confidence in the product. There are a number of industry standards that are used, such as Society of Automotive Engineers (SAE), which is a global association of more than 128,000 engineers and related technical experts in the aerospace, automotive and commercial-vehicle industries. The society has hundreds of standards that relate to different technical aspects of manufacturing. For making an easy to understand several points are highlighted below: Page 70 Chapter 6 TABLE 12: QUALITY IN THE PURCHASING PROCESS
No Quality in the Purchasing Process Explanation 6. Brand name Sometimes the quality department or development team will inform the purchasing department to only source a particular brand name. This may be due to the specific nature of the part made by one company or the level of quality it has over competitors. 7. Dimensional measurements For a part to be used in the manufacturer of a machine the part must conform to certain dimensional specifications. For example, if the manufacture of a finished item required the use of a Pentalobe TS1 screw with a length of 4mm, then the supplier must be able to produce the item in that correct size. For making an easy to understand several points are highlighted below: Page 71 Chapter 6 TABLE 12: QUALITY IN THE PURCHASING PROCESS THE REASON QUALITY PROCUREMENT MANAGEMENT IS A NECESSITY FOR LARGE COMPANIES The quality of the parts and raw materials that are used by a company makes a difference to the finished products that are sold to their customers. By ensuring that the purchased parts are of a specific quality, as defined by the development, manufacturing, or quality departments, the purchasing department is ensuring that the quality of the finished goods is maintained. FIGURE 11: REASON QUALITY IN THE PURCHASING PROCESS SUMMARY
Page 72 Chapter 6 Exercise 25 1. Define quality. (2 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 2. Identify FOUR (4) quality aspect in the purchasing process. (4 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 3. Quality Control is essential to build a successful business that delivers product that meets or exceeds customers’ expectations. Explain FIVE (5) elements of Quality Management System (10 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________
Page 73 Chapter 6 Answer 25 Quality Objectives. Start by creating quality objectives. ... Organizational Structure and Responsibilities. A results-driven eQMS will have a clear organizational structure with well-organized roles and responsibilities. ... Processes. ... Continuous Improvement. ... Document Control. 1. Define quality. (2 marks) Answer Quality is an important part of the supply chain. It is quality inspections during the manufacturing process, quality checks before goods arrive at the customer, or checking the quality as raw materials and parts enter the factory. 2. Identify FOUR (4) quality aspect in the purchasing process. (4 marks) Answer üPhysical description üDimensional measurements üChemical composition üPerformance specifications üIndustrial standards üBrand name 3. Quality Control is essential to build a successful business that delivers product that meets or exceeds customers’ expectations. Explain FIVE (5) elements of Quality Management System (10 marks) Answer
Page 74 Chapter 6 Discussion Questions: 1. List any FOUR (4) purposes in managing quality procurement activites (4 marks) 2. Explain THREE (3) objectives of managing quality in procurement logistics and supply chain (6 marks)
Page 75 Chapter 6 Answer: 1. List any FOUR (4) purposes in managing quality procurement activites (4 marks) Answer -Continous Supply -Minimize Inventory Investment -Quality Improvement -Lowest Total Cost of Ownership 2. Explain THREE (3) objectives of managing quality in procurement logistics and supply chain (6 marks) Answer 1.The quality of the parts and raw materials that are used by a company makes a difference to the finished products that are sold to their customers. 2.By ensuring that the purchased parts are of a specific quality, as defined by the development, manufacturing, or quality departments 3.The purchasing department is ensuring that the quality of the finished goods is maintained.
Chapter 7 Procurement with Ethics and Social Responsibility After reading this chapter, you should be able to: Discuss the concepts in procurement with ethics and social responsibility - Practice ethics and social responsibility in procurement - Discuss procurement and social responsibility - Discuss green procurement - Respond current issues and future issues relating to procurement Page 76
ETHICAL IN PROCUREMENT Page 77 Chapter 7 FIGURE 12: CHARACTERISTICS OF ETHICAL AND SOCIAL RESPONSIBILITY IN PROCUREMENT Determining where all purchased goods originated and the manner in which they were made Knowledge of the suppliers’ workplace principles Inclusion of ethics as a performance rating Independent verification of vendor compliance Report of supplier compliance to stakeholders Provision of detailed ethical sourcing expectations to suppliers Elements in Ethical Procurement should include –
Transparency •An open and transparent procurement process improves competition, ensures value for money, increases efficiency and reduces the threat of unfairness or corruption. Transparency is considered as one of the most effective to avoid corruption and precondition for ensuring officials' accountability. Conflict of Interest •It does not mean the employee has acted on the conflict; it only means that the conflict exists, such as when a potential vendor is owned by a relative of the employee making the procurement decision. In a perceived conflict of interest, the employee holds a position where he can appear to influence or be influenced. Corruption •Corruption is a form of dishonesty or criminal offense undertaken by a person or organization entrusted with a position of authority, to acquire illicit benefit or abuse power for one's private gain. Uses of power •Power can be used by a variety of people in a variety of ways. •power bases, requests from individuals possessing power and probable outcomes as correlated in the form of prescriptions for the manager; and •general guidelines for the exercise of power. Chapter 7 Page 78
Business Ethics is the application of ethical principles to business Corporate Social Responsibility is the practice of business ethics Ethical Sourcing is that which attempts to take into account the public consequences of organizational buying or bring about positive social change through organizational buying behavior Procurement with ethics and social responsibility PROCUREMENT AND SOCIAL RESPONSIBILITY GREEN LOGISTICS DEFINITION •Green logistics aims to move and deliver raw materials and products at the lowest possible cost while maintaining the highest standards and minimising environmental impact in the process. It implies innovation in all steps of the supply chain, the conception of product and in some cases the final use of products (McKinnon et al., 2010). •The discipline of Reverse Logistics is as important to a business's bottom-line as the usual management of procurement, logistics and spend analysis. ... The discipline of Reverse Logistics is as important to a business's bottom-line as the usual management of procurement, logistics and spend analysis. ISSUES AND CHALLENGES IN PROCUREMENT 1. 2. Improving Efficiencies and Reducing Costs 3. Great relationship management. Great relationships are often the foundation of effective procurement. 4. Strong negotiation skills. 5. Time-management. 6. Strategic thinking. Chapter 7 Page 79
Grow revenues by introducing a new differentiated sustainable products and services. Reduce costs by increasing resource efficiencies, avoiding use of noncompliment suppliers, and rethinking transportation and distribution designs. Manage risk by managing brand and developing approaches for meeting regulations and for capturing socially and environmentally conscious customers. Build intangible assets by further enhancing brand and reputation through social and environmental responsibility. IMPACT OF PROCUREMENT IN SUPPLY CHAIN Green purchasing is aimed at ensuring products or materials meet environmental objectives e.g. waste reduction, reuse and recycling Sustainability is the ability to meet current needs of the supply chain without hindering the ability to meet future needs in terms of economic, environmental, and social challenges, considers worker safety, wages, working conditions, human rights IMPACT OF PROCUREMENT AND COST OPTIMIZATION Chapter 7 Page 80 SUMMARY
Page 81 Chapter 7 Exercise 15 1. Give SIX (6) elements in ethical procurement. (6 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 2. Explain THREE (3) characteristics in ethical procurement (9 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________
Page 82 Chapter 7 Answer 15 1. Give SIX (6) elements in ethical procurement. (6 marks) i. Determining where all purchased goods originated and the manner in which they were made ü. Knowledge of the suppliers’ workplace principles üi. Inclusion of ethics as a performance rating iv. Independent verification of vendor compliance v. Report of supplier compliance to stakeholders vi. Provision of detailed ethical sourcing expectations to suppliers 2. Explain THREE (3) characteristics in ethical procurement (9 marks) Transparency •An open and transparent procurement process improves competition, ensures value for money, increases efficiency and reduces the threat of unfairness or corruption. Transparency is considered as one of the most effective to avoid corruption and precondition for ensuring officials' accountability. Conflict of Interest •It does not mean the employee has acted on the conflict; it only means that the conflict exists, such as when a potential vendor is owned by a relative of the employee making the procurement decision. In a perceived conflict of interest, the employee holds a position where he can appear to influence or be influenced. Corruption •Corruption is a form of dishonesty or criminal offense undertaken by a person or organization entrusted with a position of authority, to acquire illicit benefit or abuse power for one's private gain.
Page 83 Chapter 7 Discussion Questions: 1. Explain THREE (3) characteristics of social responsibility in procurement 2. Describe green logistics. 3. Describe FOUR (4) issues and challenges in procurement 4. Explain FOUR (4) impact of Procurement and cost optimization
Page 84 Chapter 7 Answer: Business Ethics is the application of ethical principles to business Corporate Social Responsibility is the practice of business ethics Ethical Sourcing is that which attempts to take into account the public consequences of organizational buying or bring about positive social change through organizational buying behavior Procurement with ethics and social responsibility 1. Explain THREE (3) characteristics of social responsibility in procurement. Answer 2. Describe green logistics. Answer •Green logistics aims to move and deliver raw materials and products at the lowest possible cost while maintaining the highest standards and minimising environmental impact in the process. It implies innovation in all steps of the supply chain, the conception of product and in some cases the final use of products (McKinnon et al., 2010). 3. Describe FOUR (4) issues and challenges in procurement. Answer 1. 2. Improving Efficiencies and Reducing Costs 3. Great relationship management. Great relationships are often the foundation of effective procurement. 4. Strong negotiation skills. 5. Time-management. 6.Strategic thinking. 4. Explain FOUR (4) impact of Procurement and cost optimization . - Grow revenues by introducing a new differentiated sustainable products and services. - Reduce costs by increasing resource efficiencies, avoiding use of noncompliment suppliers, and rethinking transportation and distribution designs. - Manage risk by managing brand and developing approaches for meeting regulations and for capturing socially and environmentally conscious customers. - Build intangible assets by further enhancing brand and reputation through social and environmental responsibility.
Page 85 Bibliography: Lysons, K., & Farrington, B. (2016). Procurement and Supply chain Management (Ninth edition). Pearson Education Ltd. Christoper, M. (2016). Logistics and Supply Chain Management. Pearson Education Ltd. Rushton, A., Croucher, P., & Baker, P. (2017). The Handbook of Logistics and Distribution Management. Kogan Page Ltd.
Page 86 Question: INSTRUCTION: This section consists of essay questions. Answer ALL questions. QUESTION 1 Developing purchasing strategies is one of the activities in the procurement departments. Membangunkan strategi pembelian merupakan salah satu aktiviti dalam jabatan perolehan. (a) List down TEN (10) steps in the procurement process. Senaraikan SEPULUH (10) langkah dalam proses perolehan. [10 marks] (b) Describe blanket orders with suitable examples. Jelaskan blanket orders beserta contoh yang sesuai. [5 marks] (c) Explain in detail FIVE (5) characteristics of Just in Time (JIT) concept. [10 marks] QUESTION 2 Organizations buy or outsource materials, components and services from supplier for many reasons. Organisasi membeli atau memperolehi bahan, komponen dan perkhidmatan dari pembekal untuk banyak sebab. (a) Describe TEN (10) factors to be considered in suppliers evaluation process. Jelaskan SEPULUH(10) factor yang perlu dipertimbangkan dalam proses penilaian pembekal. [10 marks] (b) Differentiate between single and multiple suppliers. Bezakan pembekal tunggal dan berganda [5 marks] (c) Illustrate any FIVE (5) types of suppliers with suitable example. Illustrasi mana-mana LIMA(5) jenis pembekal beserta contoh yang sesuai. [10 marks]
Page 87 QUESTION 3 Negotiation is among the vital skills in managing the procurement process. Without the proper skills, negotiations may fail. Rundingan adalah antara peranan yang penting dalam menguruskan proses perolehan. Tanpa kemahiran yang betul, rundingan mungkin gagal. (a) Explain THREE (3) purposes of negotiation. Jelaskan TIGA (3) tujuan rundingan [7 marks] (b) List the stages in the negotiation process Jelaskan langkah-langkah dalam proses rundingan [10 marks] (c) Discuss FOUR (4) benefits of negotiation Terangkan EMPAT(4) faedah-faedah dalam proses rundingan. [8 marks] QUESTION 4 Cash discount, seasonal discount and trade discount are among the types of discounts offered in price determination process. Diskaun tunai, diskaun bermusim dan diskaun perdagangan adalah antara jenis diskaun yang ditawarkan dalam harga proses penentuan (a) Explain TWO (2) basic approaches to price determination Jelaskan DUA (2) pendekatan harga [8 marks] (b) Illustrate using suitable examples FOUR (4) price analysis techniques in procurement Illustrasikan beserta contoh EMPAT (4) teknik analisis harga yang digunakan di dalam perolehan [10 marks] (c ) Identify THREE (3) fundamental types of competition in the market under price-setting strategy Kenalpasti TIGA (3) jenis asas persaingan dalam pasaran di bawah strategi penetapan harga [7 marks]
Page 88 ANSWER QUESTION 1 Developing purchasing strategies is one of the activities in the procurement departments. Membangunkan strategi pembelian merupakan salah satu aktiviti dalam jabatan perolehan. (a) List down TEN (10) steps in the procurement process. Senaraikan SEPULUH (10) langkah dalam proses perolehan. [10 marks] Answer 1a) 1. Procurement Planning 2. Purchase Requisition or Indenting 3. Identify Suppliers 4. Float the RFQ 5. Appraise the Quotes 6. Negotiate and Sign the Agreement 7. Release Purchase Order (PO) 8. Material Receipt and Quality Check 9. Invoice Approval and Process Payment 10. Maintain Records for Audit
Page 89 ANSWER QUESTION 1 Developing purchasing strategies is one of the activities in the procurement departments. Membangunkan strategi pembelian merupakan salah satu aktiviti dalam jabatan perolehan. (a) List down TEN (10) steps in the procurement process. Senaraikan SEPULUH (10) langkah dalam proses perolehan. [10 marks] Answer 1a) 1. Procurement Planning 2. Purchase Requisition or Indenting 3. Identify Suppliers 4. Float the RFQ 5. Appraise the Quotes 6. Negotiate and Sign the Agreement 7. Release Purchase Order (PO) 8. Material Receipt and Quality Check 9. Invoice Approval and Process Payment 10. Maintain Records for Audit
Page 90 ANSWER (b) Describe blanket orders with suitable examples. Jelaskan blanket orders beserta contoh yang sesuai. [5 marks] Answer 1b) A blanket purchase order (or standing purchase order) is a long-term contract between a supplier and organization that states the supplier will provide goods or services at a set price over a specific time period. A Blanket Purchase Order (BPO) is the preferred method for placing orders which will require multiple payments over a period of time. Examples of BPO's are: standing orders, maintenance/service contracts, and open orders. (c) Explain in detail FIVE (5) characteristics of Just in Time (JIT) concept. [10 marks] Answer 1 c) i.reduction in production costs, ii.quality improvement, iii. improvement in internal and supplier relations, iv. reduction in needed storage space, decreased manufacturing time, v. improved customer service,
Page 91 ANSWER QUESTION 2 Organizations buy or outsource materials, components and services from supplier for many reasons. Organisasi membeli atau memperolehi bahan, komponen dan perkhidmatan dari pembekal untuk banyak sebab. (a) Describe TEN (10) factors to be considered in suppliers evaluation process. Jelaskan SEPULUH(10) factor yang perlu dipertimbangkan dalam proses penilaian pembekal. [10 marks] Answer 2a) 1.Competency 2.Capacity 3.Commitment to Quality 4.Consistency of Performance 5.Cost 6.Cash and Finance 7.Communication 8.Control of Internal Processes 9.CSR 10. Culture
Page 92 ANSWER (b) Differentiate between single and multiple suppliers. Bezakan pembekal tunggal dan berganda [5 marks] Answer 2b) The main difference between multiple sourcing and single sourcing is the number of suppliers or service providers. Multiple sourcing can hire multiple suppliers while single sourcing ought to only choose one supplier among its potential suppliers. (c) Illustrate any FIVE (5) types of suppliers with suitable example. Illustrasi mana-mana LIMA(5) jenis pembekal beserta contoh yang sesuai. [10 marks] Answer 2c) 1. For clothing industry Suppliers- For garments, shop lease 2. For Publications Suppliers- Web Hosts, Designers, Paper 3. For food Suppliers- Ingredients, shop lease, packaging material 4. For automobile Suppliers- Car, truck & vehicle components, stationery 5. For gadgets Suppliers- Gadget components, assembling, records