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Quality Control:106 This is “a procedure or set of procedures intended to ensure that a
manufactured product or performed service adheres to a defined set of quality criteria or
meets the requirements of the client or customer.”
It is similar to, but not identical with, quality assurance (QA).

Quality assurance is defined as “a procedure or set of procedures intended to ensure that a
product or service under development (before work is complete, as opposed to afterwards)
meets specified requirements. Quality assurance is sometimes expressed together with
quality control as a single expression, quality assurance and control (QA/QC).”

In order to implement an effective QC program, a business must first decide which specific
standards the product or service must meet. 107These would be quality standards.

Quality Standards

A quality standard is” a detail of the requirements, specifications, the various guidelines and
characteristics of a product, relating to its quality, which must be met by a product, in order
to meet the purpose of the product, process or the service.” If we look at an electric blanket,
there would be specific minimum standards that have to be met before the product can be
safely sold because substandard blankets could result in the injury or death of its users. ISO
international standards are the most widely accepted set of quality standards adopted by
firms globally. When a company fails to meet its quality standards, it may lose the trust of
its customers and henceforth its market share.108

A product is said to be of quality when it is free from any manufacturing defect, deficiency,
or significant variation. For uniformity to be achieved in the entire set of products being
manufactured. certain specific standards need to be set. The standard defined should be
such that the features and specifications offered by the product should be capable of
meeting the implied need of the product.109

The Quality Control Process

Once the quality standards have been determined, the next step is to determine the quality
control actions. One such an action would be to decide on the percentage of units to be
tested for each lot.

Thereafter, real-world data must be collected because the test must then be done on actual
product to determine the percentage of units that fail. These results reported to
management personnel.

After this, corrective action must be decided upon and taken. Defective units must be
repaired or rejected, and poor service repeated at no charge until the customer is satisfied.

106 http://whatis.techtarget.com/definition/quality-control-QC.

107 Ibid

108 https://www.mbaskool.com/business-concepts/operations-logistics-supply-chain-terms/8836-quality-standards.html.

109 Ibid

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If there are too many unit failures or instances of poor service, a plan must be devised to
improve the production or service process and then put into action. The quality control
process must be ongoing to ensure that remedial efforts, if required, have produced
satisfactory results. The quality control process will also enable staff to immediately detect
recurrences or new instances of trouble.110

The Difference between a Process and a Procedure111

The above diagrams show how a procedure differs from a process. Basically, “a process
produces an output or product when activated and a procedure is a way in which one works
to produce an output”. An output will only be produced when a procedure is placed in the
hands of people having the ability, authority, and resources to use it. A process includes
everything that produces and influences the output. This will include the people, the tools,
the environment, the procedures, and other resources needed for people to carry out the
activities needed to produce the required process outputs.

The language used in the ISO 9000 112 series notably moved away from procedure to process
in the 2000 version but kept requirements for documented procedures. In the 2015 version
all reference to procedures have been removed. Identifying and managing critical business
processes is an important factor in the effective management of successful organisations. At
the core of the business excellence model there is a strong pulse which is generated by the
emphasis on process management. Within the context of quality management standards,
and more specifically IS0 9000, 'procedure' is a key word which has acquired a specific
meaning over the years.

110 Ibid

111https://transition-support.com/procedures_to_processes.html.

112 ISO 9000 ISO 9001:2015 sets out the criteria for a quality management system and is the only standard in the family

that can be certified to (although this is not a requirement). It can be used by any organization, large or small, regardless of

its field of activity. In fact, there are over one million companies and organizations in over 170 countries certified to

ISO 9001.

. http://asq.org/learn-about-quality/iso-9000/overview/overview.html 14 December 2017.

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While the term process appears to be new in ISO 9001:2000 , the concept of an organisation
being a network of processes was addressed in ISO 9000:1994. What is new therefore is the
concept that the results an organisation achieves come from the interaction between its
processes and not its procedures.

The following table illustrates the difference between procedures and processes.113

PROCEDURES PROCESSES

 Procedures are driven by  Processes are driven by
completion of the task achievement of a desired outcome

 Procedures are implemented  Processes are operated

 Procedures steps are completed by  Process stages are completed by
different people in different different people with the same
departments with different objectives; departments do not
objectives matter

 Procedures are discontinuous  Processes flow to conclusion

 Procedures focus on satisfying the  Processes focus on satisfying the
rules customer

 Procedures define the sequence of  Processes generate results through use

steps to execute a task of resources

 Procedures are used by people to  People work through a process to
carry out a task achieve an objective

 Procedures are static until changed  Processes are dynamic they cause
change
 Procedures only cause people to
take actions and decisions  Processes make things happen,
regardless of people following
 Procedures prescribe actions to be procedures
taken
 Processes function through the
actions and decisions that are taken

 Procedures identify the tasks to be  People select the appropriate
carried out procedures to be followed at each
stage of a process”

Procedures

At its most basic form, a procedure is a way in which one works to accomplish a task. It can
take the form of a sequence of steps that include preparation, conduct and completion of a
task. Each step can be a sequence of activities and each activity a sequence of actions. The

113 Ibid 52
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sequence of steps is vital to whether a statement or document is a procedure or something
else.

Specifications, contracts, and records are not procedures because they do not tell us how to
do anything. They describe the end results from carrying out procedures or tasks. The
relevant party must decide any further actions necessary to use these outputs. The output
will more than likely be used as inputs to other procedures.114

We need procedures regardless of whether the task we have to perform is complex or
routine, and we want it to be performed consistently Procedures are required to ensure
that actions occur in a defined manner Where we are not concerned about how something
is done and are interested only in the result, we do not produce procedures but simply issue
instructions.

Work instructions, such as transport the goods to point X, intend us to do quantitative work.
they do not tell how to do the task or the qualitative standard to which the work should be
carried out. Instructions are only procedures if they follow in a sequence and enable us to
perform a task.115

A set of self-assembly instructions is a procedure because it tells how to assemble the
product. The wording on the label, on the other hand, which tells us not to put hot objects
on the surface is an instruction or a warning which is a special type of instruction. As
procedures are normally used by people they are designed with a user in mind. The user is
normally an individual or a group of individuals, even though procedures can cover a
sequence of steps each of which is performed by different individuals or groups.

However, the understanding of procedures varies considerably depending on the context in
which they are created and used.116

Ultimately, a procedure may be defined as:” Any sequence of steps, no matter how simple
or complex that is intended to cause someone to act in a certain way to accomplish a task.”
The key is that the steps follow a sequence. A random collection of statements is not a
procedure until they are rearranged in a sequence that enables someone to proceed.117

Processes118

Processes produce results by converting. transforming or using inputs to create outputs. An
input could be anything from material, information, people, or a set of conditions. These are
passed through a sequence of stages during which they are either used, transformed or
their status changed to emerge as an output with different characteristics. Because
processes act upon inputs they are dormant until the input is received. At each stage, the
transformation tasks may be procedural, but may also be mechanical, chemical etc.

114 Ibid 53
115 Ibid.
116 Ibid
117 Ibid.
118 Ibid

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Processes do not normally recognise departmental or functional boundaries but are often
hindered by them. They also do not recognise the boundaries between customers and
suppliers. Each process has a goal in which both quantitative and qualitative measures of its
outputs are directly related to its objectives.

The transformation or process stages are designed to make sure that the combination of
resources achieves the objectives which is the desired outputs. The process must therefore
receive the right inputs to deliver the desired outputs. The correct resources must then be
applied at the right stages, in the correct quantities and in the right manner While a process
can be illustrated as a sequence of steps, as with a procedure, the similarity ends there.119

The way in which processes and procedures are used is at the heart of the difference
between the two.

We can start and stop processes. While we implement procedures and commence and
complete them, we process information. We cannot procedure information, but we can use
a procedure to process information. As an example: we have plating processes and there
may be plating procedures. In this context, the plating process comprises the resources,
people, plant and machinery, and the plating procedure contains the instructions on how to
plate material.

Processes can be interrupted but not a procedure. This is because processes are seen as
continuous and run until physical intervention. Our bodies have processes, not procedures.
The reproductive process, the digestive process, the respiratory process, these processes
are continuous and stop only when an intervention takes place. They require human
intervention in which a surgeon may employ procedures to repair them. Procedures,
however, are perceived as being discontinuous, and have steps which can be paused with
activities or actions picked up or put down at will.

Procedures usually relate to groups of activities with a given output in which the output may
not complete until it is acted upon by someone else at a later stage in the process.
Procedures can therefore be defined as the actions taken by individuals in a process that
may range across many functions and use multiple resources to deliver a predetermined
output at a given rate at a given location on a given date.120

Quality assurance in supply chain

Supply Chain Management is driven and motivated to achieve the least possible cost when
identifying and qualifying new suppliers. The supply chain management department is
therefore often recognised for exceeding their annual goals for cost savings.

In the life cycle of the final product, the initial cost savings may end up in extra costs when
the final product is manufactured and delivered.121The cost increase may result from rework
in manufacturing and poor quality of products delivered because the negotiations focused
on price and not quality. This problem is widespread for both products and services and
covers sectors such as parts, software providers, transportation, etc. Historical data and

119 Ibid. 54
120 Ibid
121 Hafeez A, The Role of Quality in Supply Chain Management, C10 Review , 2017 https://supply-
chain.cioreview.com/cxoinsight/role-of-quality-in-supply-chain-management-nid-4519-cid-78.html14 December 2017

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experts claim that quality impacts 30-70 percent of the final cost of the product. Factors
that lead to increases in cost of products are:122

a. “Rejected parts that need to be replaced, returned, scrapped or fixed.

b. Part or software failure during quality testing, and/or the next level of integration or
assembly.

c. Delays in re-work and replacement impacting production schedules.

d. Customer dissatisfaction after product delivery and warranty costs”

The Six Sigma rule of thumb123 is create the least waste possible. This counter the supply
chain management goal of least cost possible which leads to increased costs at every step of
the final product. The rule of 10 is that the cost to replace or fix an assembly increases by 10
times at each step of progression due to the poor quality of the low-cost product. For
example, a casting costing R100 is tested on site and at the first step the casting fails.

The replacement for shipping costs, delays, etc. will cost 10 times or about R1000. If the
casting passed the first step and was installed in the assembly as the next step, the cost
would increase by 10 times to R10,000 because the assembly could not be completed due
the casting being out of tolerance specified by the engineering drawings.124

Another example is in the development of web-based software, where several modules are
being developed in parallel.

During the quality check an individual module that took 50 hours at a rate of R60/hour
(R3,000) fails the tests. The time and delay costs at the first step could cost as much as
R30,000. If the module passes the first step of the quality tests, but when the module is
integrated with other modules, it causes failure. This could impact the overall software
development by a cost of R300,000 by the “rule of 10”.

Quality must and needs to be an integral part of supply chain management supplier
evaluation and qualification in order to achieve life cycle cost avoidance. It is best practice
to establish a Management Operating System (MOS) that has the following typical Key
Performance Indicators (KPI’s):125

1. On-time delivery

2. Scrap rate, re-work, and spills or escapes at supplier (ppm or per batch product) at
supplier

3. Quality of product received by customer.

4. Cycle time for resolution of customer complaints

5. Supplier quality assessment major and minor findings

122 Ibid

123 Six Sigma at many organisations simply means a measure of quality that strives for near perfection. Six Sigma is a

disciplined, data-driven approach and methodology for eliminating defects (driving toward six standard deviations

between the mean and the nearest specification limit) in any process – from manufacturing to transactional and from

product to service. Welsh J, What is six Sigma? https://www.isixsigma.com/new-to-six-sigma/getting-started/what-six-

sigma/14 December 2017.

124 Ibid

125 Ibid

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In addition to financial, regulatory, and other company qualification data, the MOS will
demonstrate the health of the supplier operation. The MOS must be agreed to at the
corporate level and the KPI acceptance targets clearly communicated within the
organisation and potential new suppliers.

The big picture must be kept in mind to evaluate supplier’s products or services for the life
cycle of the product. On-time delivery or completion of services targets of less than 98
percent are acceptable, less than 99 percent are good, and 100 percent are expected by the
customer.

Early on, time delivery can be both a benefit and a problem, depending on the goals of the
customer. Some customers welcome that the products have been delivered or services
completed, and the project could be completed ahead of schedule. In other cases, the
customers will be unhappy because inventory will build up until the product is needed.126

While Six sigma is the target, the Four Sigma level of 99.4 percent defect free is acceptable.
It is most important that scrap rates be minimised and should be less than 500 ppm for
mass production. Conforming batch parts or services targets of less than 98 percent are
deemed to be acceptable quality. Resolving customer complaints with less than 97 percent
customer satisfaction is acceptable.

Supplier quality assessments are expected to be completed by industry recognised global
registrar bodies. At the minimum, supplier’s compliance to ISO 9000 or equivalent is
acceptable for a 3-year period. Specialised processes or services will require additional
assessments for Occupation, Health, and Safety (OHS), and specific industry/product
requirements.

The journey to least waste possible does not end with supplier qualification, negotiations,
evaluation of KPI’s, and contracts. The real test comes when the supplier begins to
manufacture or provide services. It will be unusual for a supplier to achieve the KPI targets
noted above with the first round of product or services.

The supplier will need to be benchmarked to the KPI’s and continually monitored through
the MOS. Monitoring is done via production data or on-site monthly or quarterly meetings
as needed. The ability for suppliers to achieve the KPI targets will be monitored. Those
suppliers improving or exceeding the KPI’s will deliver high quality products on time and
with the least waste possible.127

From the above discussion we see clearly how supply chain management directly impacts
product quality and the overall profitability of a company. For these reasons, quality control
in the supply chain is critical for maintaining a competitive edge in the marketplace and
reducing operating costs.

Without quality control, waste grows beyond a tolerable amount.128 The importance of
quality control is relevant to the following areas:129

1. Defects and Scrap

126 Ibid

127 Ibid

128http://smallbusiness.chron.com/importance-quality-control-supply-chain-management-80588.html14 December 2017

129 Ibid

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Where raw materials are flawed, entire production lines become inefficient. This
increase defect rates in finished goods inventory. Inferior materials may require
extra machining or refining. This adds to employees’ workloads and total
manufacturing costs. Suppliers and the materials they provide are often audited by
supply chain staff members to ensure raw materials meet quality specifications.

By controlling the quality of production inputs, supply chain managers protect the
integrity of their company’s operations.

2. External Failures

When supply chain quality control is poor, there is greater risk of the products
breaking or wearing out before their warranty period expires. There are many
failures that can occur when a product leaves a manufacturing facility, depending on
the nature of the business. Customers who have to return items may lose respect for
the company from which they purchased the product. Quality control in the supply
chain helps to protect a company’s reputation. The better the control over supplier
inputs, the less risk of returns and potentially dangerous product failures.

3. Inspections

Companies that experience large quantities of defects and other forms of waste
produced during manufacturing, will often implement manual inspections to ensure
product quality. These inspections raise operating costs and are unnecessary if
quality controls are functioning properly. Quality control procedures and audits of
supplier relationships are necessary for avoiding continual inspections on the
production line. Without quality control, labour hours which could otherwise be
allocated to value-added activities will be lost inspecting materials and finished-
goods inventory.

4. Toxic Materials

Hazardous materials are used throughout the world for various reasons in
manufacturing. They are especially prevalent in defence-related industries. Quality
control helps to protect employees and other stakeholders from being exposed to
the harmful side-effects of toxic materials. The different governments prescribe
important rules for the transport of hazardous substances.

Non-compliance can lead to lawsuits, penalties, or fines, thus making quality control
imperative. The more efficiently and effectively toxic materials are handled in the
supply chain, the better for all internal and external stakeholders.

KT0104: Secure required quantities at required timescales

Knowledge Theory (KT) and corresponding Internal Assessment Criteria (IAC) / Learning
Objectives (LO) covered:

KT0104 Secure required quantities at required timescales
IAC0112 Distinguish between internal, external, and total lead time
IAC0113 Discuss techniques to expedite and measure delivery performance
IAC0114 Consider the role of scheduling, planning milestones and activities and its

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IAC0115 impact on the supply chain
Identify techniques to optimise value add through effective inventories and
low costs

Inventory decisions have a high impact throughout the supply chain. They focus on
providing the right quantity of supplies at the right time without compromising the financial
position of the firm through inventory costs or customer service levels. The primary goal in
this decision is to protect against any uncertainty that might exist in the supply chain.

Inventory is strategic because it is top management that set goals. Inventory decisions from
an operational perspective include deployment strategies (push versus pull), control policies,
determining optimal levels of order quantities and reorder points and setting safety stock
levels, at each stocking location.

Safety stock levels are critical because they are primary causes of customer service levels.
Holding large amounts of inventory in a supply chain increases cost. This makes the supply
chain less efficient It is for this reason that time scales are very important in supply chain
management.

Internal, external, and total lead time

The lead time for an item is the time it takes to obtain it, from when a demand is initiated
until it has been fulfilled. The total lead time consists of different internal and external lead
times. These are defined differently, depending on whether the item is purchased,
manufactured in-house, or distributed internally. In material planning, the total lead time is
used to calculate the date a planned transaction must be initiated to cover the demand for
an item. Generally, the lead time is measured in days. For some transactions like
distribution orders hours and minutes are considered.130

Lead times can fall under one of the following general divisions:131

1. “Administrative lead time: Represents the time required for administrative tasks
related to handling an order.

2. Postal lead time: This refers to the specific time required to send quotations and
other documents via mail.

3. Acquisition lead time: This can be subdivided into manufacturing, purchasing and
distribution times. Purchasing lead time starts when the goods or services are
ordered and ends when they are received.132

4. Transport lead time: For distribution orders the calculation between required date
and time for demand and the planned shipment to fulfil this demand will consider
transportation days as well as transportation hours and minutes.

130https://docs.infor.com/help_m3kpd_15.1.2/index.jsp?topic=%2Fcom.lawson.help.scplanhs-uwa%2Fcmms120.html 14

December 2017.

131 ibid

132http://whatis.techtarget.com/definition/lead-time-in-purchasing-procurement 14 December 2017.

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5. Inspection lead time represents the time required to quality check an item when it is
received.”

Total lead time is also called customer lead time and is defined as the time it takes for a
customer to receive a good or service from the time the customer places the order or
performs a purchase transaction.

The customer lead time is a general measure of the efficiency of the entire supply chain key
performance indicator (KPI) of an organisation. It must not be confused with production
lead time or processing lead time, which are both components of customer lead time and
total lead time as it is sometimes referred to.

Components of Customer Lead Time133

Customer lead time is often referred to a supply chain KPI. It can be broken into different
elements that can illustrate the performance of several components of the organisation. It
may be more useful in evaluating and improving operations to improve customer lead time
which is what the customer perceives. The various elements of Customer lead time or Total
lead time are:134

1. Order processing time: this is the time from when a customer places an order until
production begins on that specific order. It can be also seen as the administration
time of that order before production or processing starts.

2. Production lead time: this is the time needed to produce or process the order. It is
important to note that this is only the time where the product is produced or
manufactured. It includes all value added and idle times during the production
process.

3. Delivery lead time: this is the time it takes for an order or product to be delivered to
the customer after the product has been produced and all relevant production
activities such as quality testing are completed, and the item is released for delivery.

From the time the customer places their order there are three major periods of time until
they receive the order. The sum of the order processing time, production lead time and
delivery lead time, is referred to as the total lead time or customer lead time.

On a macro level, total lead time is the total time taken from the day procurement action
has begun to the day the stock is replenished. It has two components, these being:135

 Internal Lead time; and

 External Lead time.

These are discussed below. Processing times in some circumstances can be referred to as
the order processing time.

Internal lead time

133 http://www.leanmanufacture.net/kpi/leadtime.aspx 14 December 2017 59
134 Ibid
135 http://www.materialsmanagement.info/inventory/inventory-terminology.htm 14 December 2017.

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Internal Lead time is the time taken between raising the materials requisition request and
placing the order. It includes the entire process from receiving the order from the customer
until the finished product leaves the manufacturing facility.

To provide further understanding of the classification, pre-processing, processing, and post-
processing lead times are defined as follows:136

1. Pre-processing lead time: the time taken receiving the order from the customer,
planning, and scheduling the production by inspecting the availability of resources (raw-
materials, machinery, and workforce) and confirming the order to be released for
production If the resources are not available and have to be obtained from the supplier,
pre-processing will include supplier lead time also.

2. Processing lead time: this is the time taken to transform raw materials into finished
products for a specific order quantity

3. Post-processing lead time: the time taken for transporting the finished products to the
warehouse, inspection time, the waiting time of the stock in the warehouse before it is
delivered to customers and the time spent transporting the product from the
warehouse to the customer. This time is defined as external lead time137

External lead time

External Lead time is the time taken between placing an order to actual receipt of the item.
It consists not only of the time taken to deliver the finished product to the customer, but
also 138time taken to inspect the product and the waiting time the product spends in the
warehouse before it is delivered to the customer.

Thus, Total Lead time (LT) = Internal Lead time + External Lead time.

Techniques used to expedite and measure delivery performance.

Delivery performance can be defined as” the level up to which products and services
supplied by an organisation meet the customer expectation.” It indicates the potential of
the supply chain in providing products and services to the customer. This metric is the most
important in supply chain management because it integrates the measurement of
performance from supplier end to the customer end.139

The link in a supply chain that directly deals with customers is the delivery of goods or
services. It is therefore called the driver of customer satisfaction. Delivery is a service, and
the most important aspect of a service is dependability. Deliveries operate in a dynamic and
ever-changing environment. One way to overcome the problem this creates is to have a

136 Kalyanchakravarti, J and Vamsikrishna, T Reducing internal lead times in MTO & job-shop production environments: a

case study, Masters Theses, 2012, http://www.diva-portal.org/smash/get/diva2:616515/FULLTEXT01 14 December 2017,

at pp 18 to 19.

137 Ibid.

138 http://www.diva-portal.org/smash/get/diva2:616515/FULLTEXT01 14 December 2017.

139C. Madhusudhana Raoa, K. Prahlada Raoband V.V. Muniswamy, Delivery Performance Measurement In An Integrated

Supply Chain Management: Case Study In Batteries Manufacturing Firm, Serbian Journal of Management 6 (2) (2011) 205

– 220 http://www.sjm06.com/SJM%20ISSN1452-4864/6_2_2011_November_123-282/6_2_205-220.pdf 14 December

2017 at 205.

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total system view which seeks to understand and measure the system performance as
whole. This understanding must include how well it relates to the different actors.

Measuring delivery performance

Delivery performance can be measured as the percentage of customer orders delivered “on
time and in full” (OTIF).140 On time is either the date when the customer wants to have the
goods (requested date) or when the customer and supplier have agreed upon a date
(commit date). In full is when the supplier delivers all the items that the customer has
ordered.

There are two different definitions on which date the delivery should be carried out because
the supplier might not be able to deliver when the customer would like to have the order.
“To calculate OTIF to customer commit date, you calculate by taking the total number of
orders delivered on time and in full to customer commit date divided with the total number
of customer orders. To calculate OTIF to requested date you use the same model but use
request date instead of commit date.141”

The delivery performance measurement is more meaningful when companies’ measure
commit date instead of request date. Another definition of delivery performance is perfect
order delivery.

Perfect order delivery adds to OTIF other essential components. These are perfect invoicing
(right quantity, right price, and right item number) and perfect receipt (correct bill of lading
and packing slip).

If the supplier performs badly the supply chain managers often inflate inventory and
production flow time buffers. Delivery performance is an important component in the
overall continuous improvement of supply chain operations. Empirical research has
identified delivery performance as a key management concern.

KPIs that are used in performance measurement influence the decisions at a strategic,
tactical, and operational level. Delivery performance can be classified as a KPI metric.
Delivery reliability is defined as a tactical metric.142

Delivery performance must be measured in both financial and non-financial terms. The
inability to translate delivery performance into financial terms hinders managers’ ability to
justify capital investment for continuous improvement projects that are designed to
improve delivery performance. Advantages with measuring delivery performance in
financial terms are that it is easily understood and compatible through different processes
and stages. An important aspect of delivery performance is on time delivery. This act as a
metric for the customer service level.

Customers require dependable on-time delivery from their suppliers. Both early and late
deliveries disrupt the supply chain and need to be analysed. A delivery window is defined as
the difference between the earliest acceptable delivery date and the latest acceptable
delivery date. Delivery windows secure the most important aspect of the delivery process,

140 Hedin J, Jonsson M and Ljunggren J, Delivery Performance -How to define & measure delivery performance in a triadic

relationship, Vaxjo University 2006 http://www.diva-portal.org/smash/get/diva2:207312/FULLTEXT01.pdf 15 December

2017.

141 Ibid

142 Ibid

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reliability. Reliability is the key component to improving the delivery process. Within the
delivery window the delivery is defined as either early, on-time, or late.

Depending on the businesses situation the delivery window may be measured in hours, days,
or weeks. Companies must be flexible. Flexibility is ability to adapt the deliveries to the
customers’ requirements such as order sizes, delivery addresses and documentation.
Flexibility also refers to the ability to find solutions to the customers’ problems. Flexibility is
one of the critical factors when competing with other supply chains. Like several other
activities, delivery heavily relies on the quality of information exchanged. The quality and
the way the information is presented determine the delivery performance to a large extent,
which, therefore can be used to measure and improve performance.143

Criteria Description

On time delivery the delivery should be delivered on the correct
time

Flexibility The ability to adapt the deliveries to the
customers’ requirements.

Dependability To be able to perform a service at a regular
service level”.

Split deliveries are sometimes needed to be able to solve a delivery. The reason for split
deliveries is because it makes it possible to service a customer whose demand exceeds the
vehicle capacity. Split deliveries also decrease costs in some cases. The split deliveries must
meet the time window which is defined by the customers. The customers demand will be
fulfilled by more than one vehicle.

The most common method of delivery is on – time delivery.

On-time delivery (OTD144) is one of contract manufacturing's most common measurements.
It is defined and measured as follows.

On-time delivery explained…

OTD mostly refers to a range of dates. It seldom refers to a specific date. In most companies,
OTD refers to a range of dates defined as X days before (early) and Y days after (late) the
due date. A typical OTD window is 5 days early, 0 days late (can be expressed as -5+0).
Where, for example, an item is due June 1, it would be considered on time if it arrives on
any day between May 27 and June 1.

143 Ibid

144 On time delivery definition and measurement, http://blog.optimumdesign.com/on-time-delivery-defined 19 Dec ember

2017.

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This concept of an OTD window is rooted in almost all modern ERP/MRP systems.145 What is
important is that a company should have a way in which it defines on -time delivery.

Definition Factors

The two main factors that influence the OTD window are production line requirements and
cash flow. If a specific delivery is expensive, delivery may be planned very close to the
production need date, to prevent late delivery. Because it is expensive it cannot be early, so
a tight window is appropriate.

If the item is cheap and planned in bulk (for example floor stock of nails) it can arrive within
a very wide window and be considered on time. Regardless of what definition is used, what
is important is that it is clearly understood by the companies supply base.

Commodity Class: Companies often classify components by value. These are commonly
referred to as A items (high cost) B items (medium cost), or C items (low cost). If the system
being used has the flexibility, the OTD window can be set by commodity class. Common
windows are -5+0 for A items, -5+1 for B items, and -10+5 for C items. It is very important
that these windows must be coordinated with the planning lead times in ERP.

There cannot be a +5 days window for C items if the Enterprise Resource Planning System
(ERP) is driving C items to arrive on the day of need.146

Pull Systems: Pull systems includes Kanban, Min/max, bin replacements, etc. Most
associated with variants of ““just-in-time”” (JIT) programs, pull systems are any approach
that involves delivery triggered by an event. By contrast, in traditional push systems delivery
is triggered by a PO date. The use of OTD is not recommended for pull systems. The
appropriate performance measurement approach is stock outs. Because of limitations in
ERP environments companies often must try to apply an OTD metric to pull systems.

Where this does happen, blanket POs may be used for annual, quarterly, monthly, or even
weekly quantities. The early window must be set to equal the performance period of the
blanket. As a starting point, the blanket PO line items may be issued for one-month
requirements. In this case, set the early window to -31 and the late window to 0. Where the
firm is experiencing stock outs, the blanket window must be set to one week. If no stock
outs, you can loosen the blanket to one quarter.

Measurement Factors147

145ERP stands for Enterprise Resource Planning . It is an information system designed to coordinate the resources,

information, and processes within an organisation. It comprises of a common database that provides interfaces and

information to every department within the business.Depending on which definition of MRP you follow there are different

interpretations – Materials Requirement Planning (MRP) and Manufacturing Resource Planning (MRP II), which then

evolved into ERP. As ERP systems have developed some have moved away from their manufacturing roots. This has

resulted in failed implementations due to the chosen ERP system’s processes not matching the business requirements. The

Difference between an MRP system and an ERP System, http://progress-plus.co.uk/mrp-system-and-erp-system/ 19

December 2017

146 Ibid

147 Ibid

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Defining OTD is the starting point but measuring OTD over time is the real challenge.
Reliable OTD statistics that everyone, both within and external an organisation, can count
on are the only statistics worth tracking. Some of the challenges encountered are as follows:

Working days vs. calendar days – This is one of the most common misunderstandings
between customer and supplier.

Does 5 days early include weekends? Holidays? It does not really matter which method you
choose if the suppliers understand. Calendar days are recommended as they are natural,
easy to understand, and most widely adopted. Whichever method is chosen, the companies
ERP must be aligned. The working day or calendar day decision will affect the entire ERP
planning module.

Ship date vs. dock date: another source of confusion is the date used. Does the date used to
measure OTD refer to the date the item is shipped, or the date the item is received? It is
best practice to use the dock date, the date the item is received. This the most natural and
the most widely used. The supplier should be accountable to consider transit times when
determining what ship date, they will need to make to supply the material within the OTD
window.148

Promise date vs. required date: a promise date is the date the supplier committed to
deliver. The required date is the delivery date needed by the customer. The promise date is
best practice and the most widely used. It is not fair to hold a supplier to a requirement they
have not agreed to. Using required dates for OTD measurement is appropriate when certain
agreements are in place. An example is vendor stocking programs or guaranteed lead times
that were pre-negotiated.149

Original promise date vs. revised promise date: the promise date or the original delivery
date will often be altered at some point during the order process by either the client or
manufacturer. It will then be substituted with a revised promise date. Standard calculation
of OTD takes both original and revised promised date into account when measuring success.
This does not always happen, however, and customers may only use the original delivery
date when calculating OTD.150

Percent of line-item vs percent of quantity ordered: a line item is a single line in a purchase
order that specifies a product.

For delivery to be considered on time, every separate item must be closed, meaning the
order is filled. The percent of quantity ordered is calculated in parts per million (PPM). This
is generally considered filled when the customer has received 99 percent of the requested
order.

Purchaser vs. supplier data: a supplier's measurement of OTD often varies from the
customers. The above factors can cause the difference in measurement. There is therefore
a need to periodically reconcile each other's measurements. This should preferably be done
quarterly where there are small discrepancies. This should be done even more frequently if
large differences persist.

148 Ibid 64
149 Ibid
150 Ibid

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Through carefully considering the above factors one can ensure an accurate OTD calculation
that is a helpful metric for both buyer and seller.151

The role of scheduling, planning milestones and activities and its impact on the supply chain

Scheduling is all about taking decisions regarding the allocation of available capacity or
resources for example, equipment, labour, and space, to jobs, activities, tasks, or customers
over time. “It results in a time-phased plan, or schedule of activities. A schedule shows what
is to be done, when, by whom and with what equipment. Scheduling seeks to reach several
conflicting objectives:

1. high efficiency,
2. low inventories, and
3. good customer service.
Scheduling can be classified by the type of process: line, batch, and project152.

Line processing
An assembly line, or production line, allows manufacturers to produce large quantities of
items quickly and efficiently153. Every worker, or machine, performs a specific task to build a
portion of a product as it moves down a production line until the item is complete.
Assembly line production often works in favour of economies of scale154. As an example,
manufacturers may receive discounts on materials needed to make a product when they
buy the needed materials in large quantities for big production runs.
It can be difficult, however, to control waste and financial losses in assembly line production.
Big production lines often include expensive assembly machines that are only economical
for manufacturers to use at high outputs. Unfortunately, large production runs increase the
chances for manufacturing mistakes that produce defective products a manufacturer cannot
sell. Big production outputs also may leave manufacturers stuck with many products that
cannot be sold due to a drop, in consumer demand.

Batch processing
Batch processing, or batch production, is a reduced version of assembly line production.
Products are produced in groups instead of in continuous streams as on assembly lines.
Batch production creates delays, however, because companies must stop production lines
between batch runs. Those delays may be problematic as they can interfere with getting
products to customers on time.

151 Ibid 65
152 https://scm.ncsu.edu/scm-articles/article/scheduling 27 December 2017
153http://smallbusiness.chron.com/assembly-line-vs-batch-process-39317.html2 January 2018
154 This refers to the reduction in the average cost to make a product due to an increase in its production.

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Batch production is suitable for small businesses that do not have enough capital to run
continuous production lines. It also helps companies avoid large amounts of waste. A bakery
business owner, for example, can take an order for 3,000 cakes and make them in 3
separate batches of 1,000 each. The owner will not lose all the cakes if a manufacturing
problem ruins one batch thus reducing production risk.

Batch production is also useful for seasonal items as manufacturing can start and stop in
accordance with seasonal production demands. When retailers agree to stock new products
in their stores that ultimately do not sell well, they usually cancel future orders. Batch
processing is advantageous as it prevents manufacturers from making big investments in
new products that may not sell. Producing products in batches is seen as being inefficient,
however, because of the downtime associated with the process. Manufacturers usually
must shut down machines and reconfigure them for each new batch they produce.

They also need to retest machines to ensure their output is on target for the products being
made. The downtime between batch runs can be lengthy where the production process is
complicated or involves several machines.

Project processing

As the name implies, products are processed on a project-to-project basis. Examples of
projects are concerts, construction of buildings, and production of large aircraft. It is
important to remember the fact that that projects are characterised by difficult planning
and scheduling problems as each project is unique. and the product has not been made
before. In addition, projects are difficult to automate. Labour must also be highly skilled
because of the unique nature of the product or service being made. The table below will
summarise the product flow characteristics:155

Characteristics Line Batch Project

Product Continuous/large batch Batch Single unit
Order type Sequenced Jumbled Sequenced
Flow of product Low High Very high
Product variety Mass Custom Unique
Market type High Medium Single unit
Volume

Labour Low High High
Skills

155 Thang Nguyen NGOC, Operations and Supply Chain Management,

https://aiu.edu/publications/student/english/Operations%20and%20Supply%20Chain%20Management.html 4 January

2017.

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Characteristics Line Batch Project
Task type Repetitive Nonroutine Nonroutine
Pay Low High High

Capital High Medium Low
Investment Low High Little
Inventory Special purpose General purpose General
Equipment purpose

Objectives Low Medium High
Flexibility Low Medium High
Cost Consistent Consistent Consistent
Quality On time On time On time
Delivery

Control & Planning Easy Difficult Difficult
Production control Easy Difficult Difficult
Inventory control

The difference between planning and scheduling

In a supply chain related to manufacturing, many planning decisions to be made. These
decisions include what should ideally be made where, how much raw materials to buy in
advance to take advantage of a price break or discount or when to plan for a maintenance
shutdown to minimise the impact on customer service?

Where a business is somewhat limited by the nature of its supply and demand network, the
planning process will have to ask these questions. As demand and supply conditions change,
the answers will change accordingly.156

In modern businesses, this is normally done via a process of sales and operations planning
which is a process through which a business decides how they want to run their business in
the medium term. This can be a period of between 6-18 months. A medium-term
production planning model typically improves several consecutive stages in a supply
chain157 , with each stage having one or more facilities.158 These models are designed to

156https://blog.arkieva.com/planning-versus-scheduling-versus-execution-supply-chain-style/ 4 January 2018 67
157 It is a multi- echelon model, or multi- layered inventory system.
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allocate the production of the different products to the various facilities in each time period.
Account inventory holding costs and transportation costs are also included.

While a planning model may make a distinction between different product families, they do
not usually make a distinction between different products within a family. It could, however,
determine the optimal run length or, equivalently, batch size or lot size of a given product
family when a decision has been made to produce such a family at a given facility. Where
there are multiple families produced at the same facility, there may be setup costs and
setup times. The optimal run length of a product family is a function of the trade-off
between the setup cost and/or setup time and the inventory carrying cost.

The main goals in medium term planning involve the allocation of inventory carrying costs,
transportation costs, tardiness costs, and the major setup costs. In a medium-term planning
model, however, it is not the norm to take the sequence dependency of setup times and
setup costs into account. The sequence dependency of setups is difficult to include in an
integer programming formulation and can increase the complexity of the formulation
significantly.159

Regarding the short term, businesses still have the plans created above but they are also
looking at the latest data conditions as they are changing. This data is used to schedule
operations. Short term planning could be looking at the relative short term (10-45 days) and
is quite flexible. Even though it reacts to the latest conditions, however, it tries to stay true
to the plan.

Where, for example, the plan is to pre-build inventory for future peak demand, the schedule
tries to stay close to this plan.160

A short-term detailed scheduling model is normally only concerned with a single facility, or,
at most, with a single stage. A model like this usually takes more detailed information into
account than a planning model. It assumes that there are a given number of jobs and each
one has its own parameters. It includes sequence-dependent setup times and sequence-
dependent setup costs. The jobs must be scheduled in such a way that one or more
objectives are minimised. This could relate to the number of jobs that are shipped late, the
total setup time, and so on. Planning models differ from scheduling models in many
ways:161

1. Planning models often cover multiple stages and optimise over a medium-term
period, while scheduling models usually cover a single stage or facility and optimise
over a short-term period.

2. Planning models use more aggregate information, whereas scheduling models use
more detailed information.

3. The objective to be reduced in a planning model is usually a total cost objective and
the unit in which this is measured is a monetary unit. The objective to be decreased
in a scheduling model is normally a function of the completion times of the jobs and
the unit in which this is measured is often a time unit.

158 Kreipl S and Pinendo M, Planning and scheduling in Supply Chain, An overview of issues in Practice, Production and 68
operations Management, Vol. 13, No. 1, Spring 2004, pp. 77–92 ISSN 1059-1478 04 1301 077$1.25
http://www.poms.org/journal/2004-01-Kreipl.pdf 5 January 2017 at 77.
159 Ibid
160 www//blog … Ibid
161 Ibid

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4. While there are fundamental differences between these two types of models, they
must often be incorporated into a single framework, share information, and interact
extensively with one another162.

Finally, we get to the very near term. This is the stage where the execution takes place. In
this the time frame a business is concerned with shipping out the product on time,
minimising disruptions to the production via interjections by management or others in the
organisation with power to interrupt etc.

At this stage, business is mostly reacting to developments, unless by luck, everything goes as
per the schedule, which happens very rarely. Near term is the time where the customer’s
demand is satisfied, and money is made. Because the near-term execution and scheduling
are so reactive, they only allow for firefighting, and small additional gains to the business.

In the planning stage where higher value answers can be found: It is possible in planning to
have a multi-million Dollar solve; by the time you are in scheduling and execution, you are
dealing with very small fractions of that.163

Certain industries, for example food/CPG for and businesses of a certain size i.e., < ~ R150M
have a very tough time making the shift from scheduling focused to planning focused.

The history of planning and scheduling suggests, however, that while scheduling is
important, planning is where the greater value is created. Leaders of small and medium size
businesses should assess this for themselves and seek to learn from bigger companies who
have already learnt this lesson and have the growth to show for it.164

Scheduling and planning within the supply chain

Supply chain or production distribution networks ultimately want to produce and deliver
finished products to end consumers in the most cost effective and timely manner. This
overall goal forces each one of the individual stages to develop its own objectives. Planning
and scheduling in a global supply chain requires the coordination of operations in all stages
of the chain. The many models and solution techniques used in individual stages must
therefore be integrated within a single framework. 165

The different models that represent successive stages must exchange information and work
together with one another in various ways. A continuous model for one stage may have to
interact with a discrete model for the next stage. Planning and scheduling procedures in a
supply chain are typically used in various phases:166

a. a first phase involves a multi-stage medium term planning process (using aggregate
data), and

b. a phase thereafter performs a short-term detailed scheduling at each one of those
stages separately.

Usually, whenever a planning procedure has been applied and the results have become
available, each facility can apply its scheduling procedures. Scheduling procedures are
usually applied more frequently than planning procedures.

162 Kreipl S and Pinendo M at 78 69
163 Ibid
164 Ibid
165 Kriepl S and Pinendo M at 81.
166 Ibid

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Each facility in every one of these stages has its own detailed scheduling issues to deal with.
If successive stages in a supply chain belong to the same company, then these stages are
usually incorporated into a single planning model. The medium-term planning process seeks
to minimise the total cost over all the stages. Costs that must be minimised in this
optimisation process include production costs, storage costs, transportation costs, tardiness
costs, non-delivery costs, handling costs, costs for increases in resource capacities e.g.,
scheduling third shifts) and costs for increases in storage capacities.167

In this medium-term optimisation process, some input data is only considered in an
aggregate form. Time is often measured in weeks or months rather than days.

Distinctions are usually only made between major product families. No distinctions are
made between different products within one family. A setup cost may be considered, but it
will only be considered as a function of the product itself and not as a function of the
sequence.

The results of this optimisation process are daily or weekly production quantities for all
product families at each location or facility. Results include the amounts scheduled for
transport every week between the locations. The production of the orders requires a certain
amount of the capacities of the resources at the various facilities. No detailed scheduling
takes place in the medium-term optimisation, however. The output consists of:168

a. Allocating resources to the various product families,

b. Allocating products to the various facilities in each time period, and

c. The inventory levels of the finished goods at the different locations.

As mentioned above, in this phase of the optimisation process, a distinction may be made
between different product families, but not between different products within the same
family. The model is normally formulated as a Mixed Integer Program. Continuous variables
are often used to represent quantities that should be produced. The integer or discrete
variables are often 0-1 variables. They are needed in the formulation when a decision must
be made whether specific product family will be produced at a certain facility during a given
time.

The output of the medium-term planning process is an input to the detailed short-term
scheduling process. The detailed scheduling problems usually try to optimise each stage and
each facility separately. In the scheduling phase of the optimisation process, the process is
therefore partitioned according to:

i. the different stages and facilities, and

ii. the different time periods.

In every detailed scheduling problem, the scope is therefore much narrower regarding time
and space. The level of detail taken into consideration is much higher. This level of detail is
increased in the following ways:

i. time is measured in a smaller unit (e.g., days or hours). The process may even be
time continuous,

167 Ibid 70
168 Ibid at 82
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ii. the horizon is shorter,

iii. the product demand is more accurately defined, and

iv. the facility is not a single entity, but a collection of resources or machines. The
product demand now does not consist of aggregate demands for entire product
families, as in the medium-term planning process. In the detailed scheduling
process, the demand for each individual product within a family is investigated.
The minor setup times and setup costs in between different products from the
same family are considered together with the sequence dependency.

The factory is now not a single entity. Each product must undergo several operations on
different machines. Each product has given route and processing requirements on the
various machines. The detailed scheduling problem can be analysed as a job shop problem
and various techniques can be used, including:169

i. dispatching rules,

ii. shifting bottleneck techniques,

iii. local search procedures (e.g., genetic algorithms), or

iv. integer programming techniques.

The objective considers the individual due dates of the orders, sequence-dependent setup
times, sequence-dependent setup costs, lead times, as well as the resource costs.

If two successive facilities or stages are tightly coupled with one another for example, where
the two facilities operate according to the “just-in-time” principle, then the short-term
scheduling process may optimise the two facilities jointly. It may see them as a single facility
with the transportation in between the two facilities as another operation.

The interaction between a planning module and a scheduling module may be intricate. A
scheduling module may cover only a relatively short period, for example, one month. The
planning module may cover a longer period e.g., six months.

After the schedule has been fixed for the first month170, the planning module does not
consider this first month anymore. It is assumed that schedule for the first month is fixed.
The planning module then tries to optimise the second up to the sixth month. In doing so, it
considers the output of the scheduling module as a boundary condition. It may also be the
case that the time periods covered by the detailed scheduling process and the medium-
term planning process overlap. A planning and scheduling framework for a supply chain
normally will have a mechanism that allows feedback from a scheduling module to the
planning module. This feedback mechanism enables the optimisation process to go through
several repetitions. It may be used under various circumstances:171

i. The results of the detailed short- term optimisation process may show that the
estimates used as input data for the medium-term planning process are not
accurate. The average production times in the planning processes do not take
the sequence dependency of the setup times into account. Setup times are

169 Ibid 71
170 Fixing the schedule for this month required some input from the planning module.
171 Ibid

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estimated and embedded in the total production times. The total setup times in
the detailed schedule may be higher than the setup times anticipated in the
planning procedure. Where the results of the detailed scheduling process
indicate that the input to the planning process must be modified, new input
data for the planning process must be generated and the planning process
redone.

ii. There may be an external reason that requires a feedback from the detailed
scheduling process to the medium-term planning process. A major disruption
may occur on the factory floor level, such as, an important machine goes down
for an extended period.

The disruption may be of such a magnitude that its effects cannot be contained
within the facility where it occurs. The entire planning process may be affected.
The scheduling processes at other facilities will also be affected. A framework
with a feedback mechanism may allow the overall optimisation process to
repeat.

The individual modules within the planning and scheduling framework for a given chain may
have other features. Two types of features are decomposition features and so-called
discretisation features. Each of these features can be activated and deactivated by the user
of the system. Decomposition172 is mostly used when the optimisation problem is too large
to be dealt with effectively by the routines available.

At the end of the process, the partial solutions are put together in a single overall solution.
Decomposition can be done according to:173

i. time.

ii. available resources (facilities or machines).

iii. product families; and

iv. regional areas

Some of the decompositions may be designed in such a way that they are activated
automatically by the system itself. Other decompositions may be designed in such a way
that they must be activated by the system user. Decomposition is used in medium term
modules as well as in detailed scheduling modules.

In medium term planning, the decomposition is based mainly on time and/or on product
family. These may be internal decompositions which the system itself activates. The user
may specify in a medium-term planning process a geographical decomposition. In the
detailed scheduling process, the decomposition is often machine-based. This type of
decomposition may be done internally by the system or put forward by the user.

One type of discretisation feature may be used when the continuous version of a problem.
An example would be a linear programming relaxation of a more realistic integer
programming formulation that does not provide sufficiently accurate results. To obtain
more accurate results, certain constraints may have to be imposed on given variables.
Production quantities cannot be allowed to assume just any values. Only values that are

172 A decomposition process partitions the overall problem into many subproblems and solves the smaller subproblems

separately.

173 Ibid at 83.

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multiples of given fixed amounts or lot sizes174 The quantities that are to be transported
between two facilities also have to be multiples of a fixed amount (e.g., the size of a
container). This type of discretisation may transform the problem from a continuous
problem (i.e., a linear program) to a discrete optimisation problem.175

Another type of discretisation can be done with respect to time. It allows the user of the
system to determine the size of the time unit. If the user is only interested in a rough plan,
he may set the time unit to be equal to a week.

As a result, the results of the optimisation will only specify what is going to be produced
that week but will not specify what is going to be produced within each day of that week. If
the user sets the time unit equal to one day, the result will be much more precise. Besides
specifying the sizes of the time units, a system may use time units of different sizes for
different periods.

The discretisation feature is often implemented in the medium-term planning modules. The
first week of a three-month planning period may be specified daily. The next three weeks
may be determined on a weekly basis. All activities beyond the first month are planned
based on a continuous model. Discretisation with respect to time does not change the
nature of the problem. If the problem is a linear program, then it will remain a linear
program.176

Techniques to optimise value added through effective inventories and low costs.

A value chain differs from a supply chain. A supply chain is the process of all parties
involved in fulfilling a customer request, while a value chain is a set of interrelated activities
a company uses to create a competitive advantage177.The idea of value chain was pioneered
by Michael Porter. There are five steps in the value chain which give a company the ability
to create value that exceeds the cost of providing its good or service to customers. By
maximising the activities in any one of the five steps a company will have a competitive
advantage over competitors in its industry. The five steps or activities are:178

1. inbound logistics. These include receiving, warehousing and inventory control,

2. operations. These include value-creating activities that transform inputs into
products,

3. outbound logistics. These include activities required to get a finished product to a
customer.

4. marketing and sales. These are activities associated with getting a buyer to purchase
a product, and

174 An example is the capacity of a tank in the brewing of beer. 73
175 Ibid
176 Ibid
177 Investopedia, What is the difference between a value chain and a supply chain?
https://www.investopedia.com/ask/answers/043015/what-difference-between-value-chain-and-supply-chain.asp 5

January 2017
178 Ibid

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5. service activities. Those activities that maintain and enhance a product's value, such
as customer support.

The supply chain incorporates the flow of all information, products, materials, and funds
between the different stages of creating and selling a product. This includes every step in
the process, from creating a good or service, manufacturing it, transporting it to a place of
sale, and then selling. The supply chain includes all functions involved in receiving and filling
a customer request.

These functions include product development, marketing, operations, finance, and
customer service. Most companies have a constant goal of finding the best method to
control one of their largest assets, their inventory.

What is inventory?

Inventory includes the raw materials, work-in-process products and finished goods that are
seen to be the portion of a business's assets that are ready or will be ready for sale.
179Inventory is one of the most important assets of a business because the turnover of
inventory represents one of the main sources of revenue generation and subsequent
earnings for the company's shareholders. Inventory refers to finished goods or goods in
different stages of production that a company keeps at its premises. It can also be on
consignment.180

Inventory is reported on a company's balance sheet under the current asset’s category. It
also serves as a buffer between manufacturing and order fulfilment. When an inventory is
sold, its carrying cost goes into the cost of goods sold on the income statement.

Types of Inventory

There are three items typically classified as being part of inventory:181

a. raw materials,

b. work in progress; and

c. finished goods.

Raw materials are goods that are used in the production as a source material. Examples
include metal bought by car manufacturers, fabric held by clothing factories, food
ingredients held by food preparation companies and crude oil held by refineries.

Work in progress refers to goods that are in the process of being transformed during
manufacturing and are about to be converted into finished goods. A half-assembled airliner
or a ship that is being built would be an example of work in process.

Finished goods are products that have gone through the production process and are ready
for sale. These include completed airliners, ready-to-ship cars, and electronics. Retailers
who buy and resell goods typically call inventory merchandise. This includes finished goods
bought from producers and can be resold immediately. Examples of merchandise are

179 https://www.investopedia.com/terms/i/inventory.asp 7 January 2017

180 This is an arrangement when a company has its goods at third-party locations with ownership interest retained until

goods are sold.

181 Ibid

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electronics, clothes and cars held by retailers. So, inventory or stock differs depending on
who holds it.182”

Valuation of Inventory

Accountants value inventory using one of the three methods:183

1. “The first-in, first-out (FIFO) method. Here the cost of goods sold is based on the cost
of materials purchased the earliest, while the carrying cost of remaining inventory is
based on the cost of materials bought the latest.

2. The last-in, first-out (LIFO) method. The cost of goods sold is valued using cost of
materials bought latest, while the value of remaining inventory is based on materials
purchased earliest.

3. The weighted average method. This requires valuing both inventory and the cost of
goods sold based on the average cost of all materials bought during the period.”

Importance of Inventory Management

Keeping a high amount of inventory for a long time is usually not beneficial for a business
because of costly storage, the possibility of obsolescence and spoilage costs.

Possessing too little inventory is also not good because the business runs the risk of losing
out on potential sales and potential market share as well. Inventory management forecasts
and strategies, for example the just-in-time (JIT) inventory system, can help minimise
inventory costs because goods are created or received only when needed.

Many different methods of inventory control exist. These range from the very basic to the
very complex. All methods have one goal. They seek t to have the lowest total cost of
ownership while having the highest possible service levels. Some methods find a balance
between the cost and service components. Others favour one component over the other.184

Foundational Truth

Inventory control methods vary from company to company, commodity to commodity and
stock keeping unit (SKU) to SKU. The inventory control method that works best for slow-
moving items might not work very well for fast-moving items.

A company may have 1 million different SKUs and use only five different inventory control
methods. There is no perfect method to manage inventory, however. A company can only
try to find the best method that results in reduced cost and increased service levels.185

Basic Method

Many small businesses use a basic method of inventory control called minimum stock levels.
With this formulae, additional stock gets ordered when the existing stock has reached a

182 Ibid 75
183 Ibid
184 Hamlett K Methods of inventory control, http://smallbusiness.chron.com/methods-inventory-control-2234.html7

January 2018.
185 Ibid

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certain level. For example, a small business sets a minimum stock level of 80 units on an
item that sells at an average rate of 200 units every five days. When the inventory reaches
80 units at the end of day three, the company will then order additional stock.186

“Just-In-Time” (JIT)

This is one of the most popular methods for controlling inventory in the manufacturing
environment. JIT aims to deliver inventory to the production floor “just-in-time” for use. The
JIT method delivers only the exact quantities required to complete current production.

JIT inventory control depends highly on the ability of the company’s suppliers to deliver on
demand. In most manufacturing environments using JIT delivery, the supplier’s warehouse
is very close to the manufacturing facility.

Economic Order Quantity (EOQ)

The economic order quantity, commonly referred to as EOQ, tries to find a balance between
holding too much or too little inventory. The EOQ formula can get quite complex. To make
use of it, a company must know the following information:

a. annual usage in units,

b. ordering cost in currency per order,

c. annual carrying cost rate as a decimal of a percentage,

d. unit cost in dollars, and

e. the order quantity in units.

This method aims for the order quantity that has the lowest total cost of carrying the
inventory.187

Safety Stock

Safety stock refers to the extra stock carried above the normal stocking level requirements.
This is done as a buffer against uncertainty. Reasons for using safety stock as an inventory
control method include supplier performance problems, long lead times and material
uncertainty. Calculating safety stock quantities involves another complex formula. Most
large companies have software that automatically calculates safety stock values. For the
small business that works on a very tight budget, carrying additional inventory in the form
of safety stock may do more harm financially than the benefits gained from carrying the
inventory.

For businesses carrying inventory, understanding, and effectively managing their inventory
is vital to ensure optimum profitability and cash flow within the business. Here are 15
techniques that can be used:188

1. Adopt a connected cloud-based business management platform with real-time
analytics. An optimal solution minimises data entry and enables the flow of accurate

186 Ibid 76
187 Ibid
188 https://www.tradegecko.com/blog/15-techniques-for-improving-inventory-management 6 January 2017

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inventory financial information. These data flows are from the store clerk, through to
the purchasing officer, and across to management. This ensures everyone can make
informed decisions in a timely manner.

2. Update inventory records promptly, so all key staff have access to timely information.
This also ensures that inventory can be managed and re-stocked accordingly. To stay
competitive, businesses must make decisions fast, and have access to reliable
information.

3. Split inventory into different categories and analyse categories separately. The most
important step a business owner can take to improve inventory management is to
divide inventory into groups based on how fast the product turns, profitability/ etc. and
analyse.

4. Maintain an active working relationship with suppliers. Because suppliers are a
partner in one’s business, open lines of communication help businesses provide goods
to their clients at the price and time frame they desire. A supplier whom the business
has a good relationship with may proactively notify the business of potential shortages.
It can also work with the business to devise workarounds to meet customers’ demands,
for example, liaising with a competitor or seeking different sources. Consumers are now
encouraged to buy domestic products. Businesses may therefore find themselves
working with suppliers to source local products. Discussions should not just be about
getting the lowest price; long-term, open relationship are just as important.189

5. Establish the ability to monitor all aspects of the inventory. Putting a connected
system in place which adjusts stock levels directly from a company’s sales channels will
enable excellent visibility into what is selling well, what is not and the corresponding
margins that come along with it to shape future decision making.

6. Utilise mobile devices where possible. Staff must be trained on how to use mobile
devices, such as iPads or barcode scanners, so stock movements can be tracked, and
financial records updated in real time. This avoids the unnecessary burden of updating
paper stock reports, minimises mistakes and wasted admin time. It is also good practice
to ensure mobile devices can perform the required tasks, charging stations are available,
and security measures in place to avoid theft of the devices.190

7. Deal with slow-moving goods to ensure they do not become technologically obsolete,
pass their use-by date, or carry a value that is greater than that for which they can be
sold. Inflation or changes in currency value can affect the perceived sales value of the
product, in both directions. The company must think of inventive ways to sell older
inventory, such as heavily discounting. Because the cost value of inventory may be
difficult to recover, especially when the items have been held for a long period of time,
it is important to keep the inventory age as young as possible.

8. Plan an optimal warehouse layout that suits your inventory. Restructure your
warehouse so that fast-moving items are closest to the fulfilment area. They should also
be put on flow racks or other high-accessibility storage solutions, not just boxes or

189 Ibid 77
190 Ibid
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pallets on racks. One could also consider implementing a barcode scanning system to
improve handling and fulfilment.191

9. Establish re-order quantities and have low stocks alerts in place. Assess whether re-
order quantities are working and adjust, as necessary. Where a company never runs out
of stock, this could be because It is holding too much stock. Running out of stock may
mean the company do not have stock available to meet customer requirements. There
must be clarity on who is responsible for re-ordering inventory.

Many small businesses put appropriate systems in place to manage inventory. They
spend most of their time manually managing their inventory and not enough time on
strategic decision-making in that regard. Re-order quantities and low-stock alerts are
both important. Forecasting inventory must be even more critical.

10. Cultivate open lines of communication internally. Where a big or unusual sales order is
in the pipeline, the sales team must have processes in place to notify the purchasing
officer and others involved in inventory management. In anticipation of the order, the
purchasing department may need to proactively talk with suppliers, train additional
staff and free up space in the warehouse.

11. Plan for the future. When current inventory management processes cannot cope with
the business growth, they will be a painful bottleneck in a company’s inventory cycle.
Businesses need to start preparing in advance to adopt solutions that can handle their
business evolution.

The greatest challenge small businesses may face is prioritising the time of the founders
and key staff over the short-term cash flow hit that a business may take from
implementing a well-functioning and useful inventory management system. Excel is a
cost-effective way of managing inventory. It comes at a high price in the time small
business owners spend reconciling and managing their stock. This is a time they should
be spending selling or planning for growth.

12. Share relevant inventory data, in digestible format, with the business team so they
have a complete understanding of what is taking place in the business. While they all
have their own roles and responsibilities, this knowledge assists them in understanding
what the business does, where they fit in the business, and how they can help business
sales growth.

13. Maintain up-to-date stock levels. This ensures that inventory can be managed in a
timely manner and restocked, as necessary. The chosen accounting system must have
the ability to run a perpetual inventory management system and management should
get very familiar with running inventory value reports. A perpetual inventory system
means that the accounting system can provide a list of the quantity and cost of each
item code at any given point in time.

14. Store inventory safely and securely. Inventory must be housed in a safe and secure
environment, because products must be kept in the best possible condition and ready
for sale. It is very important that packaging does not look damaged prior to sending to
customers because this instantly raises questions on the quality of the products. This

191 Ibid 78
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also applies to the food products as well. These items also involve the added
requirement of ensuring they are not exposed to unnecessary heat or extensive
sunlight. Security also prevents stock loss due to poor storage conditions.

15. Undertake regular (at least an annual) full inventory stock-take and conduct regular
spot-check counts of inventory. Most inventory systems can group inventory items. An
example is bearings, bolts and so on. As a result, a stock count sheet can be printed on
just one group of items, and personnel can cycle through, conducting counts using small,
manageable reports that will not take many days to complete. Many business owners
find inventory counts such a big task they do not get done.

By making the count smaller, there is a better chance of accomplishing the task. If a
difference is found between the actual count and the system generated quantity, then
one can investigate the cause. This could be because a clerical error of using the wrong
item code when buying or selling, or theft by an employee.192

192 Ibid. 79
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Chapter 2 – KM-02-KT02: Main tasks associated with stages of the
sourcing process.

The topic elements to be covered in this chapter include:

KT0201 Supply needs identified
KT0202 Criteria for creating specifications
KT0203 Sourcing of supplies
KT0204 Formation of agreements with external organisations

The internal assessment criteria or learning outcomes relevant to this chapter are as
follows:

IAC0201 Describe the process of identifying supply needs from customers as a basis for
the make or buy decision
IAC0202
Describe the importance of specifications for products and services in contracts
IAC0203 with external customers and suppliers, with specific reference to conformance
and output-based approaches and the role of key performance indicators
IAC0204 (KPIs)
IAC0205
Discuss the role of surveying the market and its relevance to the supply chain
IAC0206 function
IAC0207
IAC0208 Explain the use of e-sourcing technologies
IAC0209
IAC0210 Discuss the relevance of measuring supplier performance to the supply chain
function

Illustrate the potential impact of queries and clarifications on the supply chain

Identify the possible impact of mistakes and delays on the supply chain

Discuss the use of reverse auctions/ e-auctions

List the key elements of forming agreements with customers and suppliers

Discuss the context of transition and mobilisation arrangements

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KT0201: Supply needs identified.

Knowledge Theory (KT) and corresponding Internal Assessment Criteria (IAC) / Learning
Objectives (LO) covered:

KT0201 Achieve quality supplies
IAC0201 Describe the process of identifying supply needs from customers as a basis
for the make or buy decision

The process of identifying supply needs from customers as a basis for the make or buy
decision.

Customer attitudes are shaped by their experience, opinions, and dealings with a company,
whether direct or indirect. When companies do not have a clear understanding of what
customers need or want, they will be at a loss when trying to encourage customers to buy
their products, no matter how good they are.193

Companies need a marketing strategy to uncover, create, and demonstrate why current and
prospective customers need to offer that to them to succeed. Businesses need to
remember that customers seldom purchase without a list of requirements. The job of the
marketing team’ is to clearly understand what those requirements are and define why their
specific company is the only one that can effectively meet those needs, in the way they
desire.194

Ten questions a business should ask…

No single company can satisfy every need of every customer. Where a company knows the
specific needs of the customers being targeted, it can deliver value and encourage
customers to become loyal and even spread the word to others. To truly understand and
segment a market, there are ten things a business team must continuously address about its
customers:195

1 – Who are my customers?

Individual customer files must include age, gender, marital status, occupation, and what
type of customer. Are they being loyal, discount, impulse, needs-based or wandering?
Businesses or industrial clients will usually buy in larger quantities and have different
requirements than individuals.

2 – What do customers buy?

Knowing what products and services a good reputation amongst customers have will enable
a business to adjust its inventory and produce goods with the quality’s customers are
looking for.

193 How marketing discovers customers’ needs, https://www.cleverism.com/marketing-discovers-customer-needs/ 7 81
January 2017.
194 Ibid
195 Ibid

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3 – What do customers do?

Knowing the occupation of its consumers and the goals of the industries it sells to, will
enable a business to tailor its products and services to meet their needs.

4 – Why do customers buy?

Knowing why a specific product is in demand will give it needs a business the advantage to
match customer desires and supply the benefits they seek.

5 – When do customers buy?

Providing a customer with an item when they want it increases chances of success and
reduces the chance of producing goods that are no longer desired. Studying buying patterns
will also help with successful launches of new products. It will also enable guide business on
the timing of when to offer added value for products that are not very popular.

6 – How do customers buy?

There are various outlets for people to shop such as online, face-to-face, catalogues and
wholesale. Knowing the way consumers shop helps businesses tailor their advertising to
meet consumer needs.

7 – How much do customers spend?

Patterns of customer spending give an accurate picture of consumer behaviour and show
economic, household, social and market trends.

8 – Whom do customers buy from?

People buy to solve problems, so knowing who is currently solving their problems helps a
business to tailor its solution strategies.

9 – What do customers think about the business?

Where a company is providing an exceptional customer experience, customers will continue
to buy. There are various ways to measure customers’ satisfaction.

10 – What do customers think about a business’s competition?

When a company sees its competitors through its customers eyes, it has a better chance of
staying ahead of rival companies.

Marketing Techniques to Discover Customer Needs
Latent Needs/Observation Technique

These are hidden customer needs. These would be problems they face but have not yet
realised. Marketers seek to intently observe the consumer in their natural setting to see or
hear frustrations and longings. To understand the potential customers real self, they need
to observe customers doing exactly what they would with the product. The results of this
method can help to modify research and results. A common observational technique is
computer cookies that track web views and visits.

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Direct Needs/ Research or Conversation
Expressed needs are clearly made known by the customer. Market research gathers data to
help businesses make decisions about products and services. There are many types of
methodology. For new information, these include qualitative and quantitative research
based on opinion panels such as online polls and questionnaires, testing done by users and
secondary research which uses existing information to determine trends.196

Assumed Needs/Feedback Method
These are the assumptions businesses make about what their customers require. This is the
riskiest form of feedback. The best way to test these assumptions is through gathering
customer feedback through interviews, surveys and contact forms. There are many other
aspects to customer discovery. Focusing on these basic needs is a great place to start.

Customer Discovery Process
The Customer Discovery Process has 4 Steps.
State Your Hypothesis: Write your core business assumptions so they may be tested.
Test Your Hypothesis: Validate or disprove your hypothesis through your target market,
potential customers, and media. Do not make sales the centre of the conversations.
Test Your Product Concept: Once the main customer problem has been highlighted, testing
can be done to see the relevance of the business’s idea to the customer and the solution it
offers. Customers should be engaged in this process. Changes should be made at this stage.
Evaluate Feedback and Plan Next Steps: Based on the information obtained in phases 2 and
3, determine if you are ready to proceed or if the project must be re-evaluated.
Professor Steve Blank believes that once a product has been proven to be the solution to a
business’s customers’ problem, the customer discovery process must go through the
following 3 phases.

3 Phases
Problem-Solution fit: This phase is to determine whether the problem is worth solving. It
usually takes weeks or a couple of months to complete.
Minimum Viable Products (MVP): This phase is sometimes called “valley of death,” because
it is the hardest stage due to all the repetition of processes and solutions needed at this
stage. Some companies run out of ideas or money in the numerous years this phase can
take.
Sales Funnel or Customer creation phase: Once a product has shown viability and has
started gaining momentum with a business’s customers, it will need a lot of growth to raise
capital and even secure investments.

196 Ibid 83
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To ensure the enterprise gets to this stage, marketers need to create a following through
advertising or blogging or signs and announcements. They should also ensure that changes
are made early, so the products are feasible and valuable to the prospects and they can save
on costly recalls.197

Customer Validation: The Final Three Steps.

A company’s marketing team must be very active with discovering exactly what it is that its
customers need. It should also make sure, through feedback and testing that the products
will be viable and well received. A superb marketing group will also anticipate customers’
needs through observation of behaviours and trends and coax out unexpressed needs the
consumer was not even aware of. Where customer discovery is the beginning of the
marketing process to pull prospects in, customer validation is the stage that will ensure they
are converted into brand evangelists, and your business model is solid.

This is a very crucial step to be taken before the business launches its new product as it can
use this process to predict sales outcomes and determine its market position. Once the
company have gone through the steps of the customer validation process it can scale itself
and create a demand for the new product.198

Validation of Minimum Viable Product: a company could lose a lot of time and money not
validating its products. When the need is no longer valid customers will move on to look for
what they need at that time. To produce high quality, substantial products, companies must
listen to their customers and make small changes. This will ensure customers are passionate
about a company’s offerings. The company will be assured of its core values.

Validation of Sales and Marketing Roadmap: With the generated momentum gained
through complete understanding of a company’s market segment, and the expanding base
of loyal customers, a company can guarantee its investors, accountants, and shareholders
that for every rand spent in advertising, is bound to do more than break even. This provides
the company with a clear objective for sales and gives it confidence in its marketing and
advertising strategy.

Validation of Business Model: A company’s customers are so pivotal in helping to validate
its products, advertising, and marketing model, that it is essential to continue involving
them in the fine tuning its business model.

A business model is defined as “a design for the successful operation of a business,
identifying revenue sources, customer base, products, and details of financing.” It can also
be defined as a plan of action, which directs all a company does in business to create profit
and customer satisfaction.199

197 Ibid 84
198 Ibid
199 Ibid

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Modern Marketing Strategies to Implement in Business

1 – Research

Modern consumers want to be involved in the marketing process. This makes the use of
modern techniques such as search engines, Google Trends, social media, and behaviour
analysis important marketing tools. Search engine keywords allow business to learn which
terms users are entering to find their businesses and products. Keywords also help to
predict market shifts in product demands and trends.

Google AdWords is one of the biggest search engine marketing (SEM) tools that uses both
search engine optimisation (SEO) and advertising to ensure that a business can be found
online. Google Trends is a great tool to analyse consumer behaviour, by viewing their
interests and searches over time. This tool is great for helping business with insights on
product launch dates, seasonality, and what advertising messages are being received
where.200

As of January 2014, 74% of Internet users used social Networking sites such as Facebook,
Twitter, LinkedIn, and Pinterest. Qualitative online research can be done through various
social media platforms to gather information on people’s internet preferences, for data
mining, creating a buzz and for insights on what to market and how. Customer behaviour
analysis provides details on what customers want and need by looking at their spending
habits or lack thereof. This enables marketers to zoom in and pinpoint exactly what areas of
the market they want to target, who is in it and how and why they spend.

2 – Feedback/Collaboration

Because consumer behaviour is ever changing, research and marketing skills, techniques
and methods need to evolve to unlock and meet the needs of the customer. Consumers
want to feel empowered to give their opinions about when they feel like it and to support or
boycott a brand that rises to meet their expectations or falls flat. They also want to be able
to incorporate their online lives with offline attitudes and allow that to determine their
spending habits.

Due to the nature of the modern consumer, proper care must be taken to observe and
communicate with but not to over tax them with requests. It is essential to take into
consideration that modern consumers want to be part of the creative process. They want to
have their thoughts and feelings tapped into and implemented into the creation of products
they buy.

3 – Customer Relationship Management

Another way to figure out the customer needs and to understand and follow up with the
customers is Customer Relationship Management. Great marketers and companies know
that to build customer relationships they must:

200 Ibid 85
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a. Establish mutually satisfying goals between consumer and company because this
creates a customer focus. This, ultimately, achieves the initial objective of increasing
profits through customer satisfaction. With mutual satisfaction, the aim, and the
customer the focus the businesses main challenge will then be to ensure they can
deliver what the customer wants and therefore ensure they are returning and
referring. To develop this relationship, businesses must employ a new approach, one
that allows for connectivity and satisfaction.201

b. Develop and maintain rapport with customers, marketers, suppliers, managers, and
investors. Being transparent and providing company briefings to all those involved
can inspire trust and connection. Many resources should be dedicated to ensuring
the flow of conversation and feedback is continuous, documented and implemented.
Consumers do not want to waste time filling out surveys that do not actively deal
with their complaints. Where companies do not change, they run the risk of losing
their customers.

c. Produce positive feelings in your customers and all employees. Bad news spreads in
business and is very detrimental. People will quickly discourage others from using a
company’s product or service if they have had a bad experience. It is important to
make sure that the business puts out quality products consistently and pays strict
attention to customer service culture. This is the facet of a business which the
customer sees and is the most judged.

The development of a world-class professional SCM system should result in continuing
improvement in affordability and value for money. These improvements are based on total
cost of ownership and quality of procurement as competition amongst suppliers is
enhanced.

d. Demand Management. This is the beginning of the supply chain where:

• a needs assessment is done to ensure that goods or services are acquired to
deliver the agreed service.

• specifications are precisely determined.

• requirements are linked to the budget; and

• the supplying industry has been analysed.

This phase will bring the supply chain practitioner close to the end user, to ensure that value
for money is achieved.

KT0202: Criteria for creating specifications.

Knowledge Theory (KT) and corresponding Internal Assessment Criteria (IAC) / Learning
Objectives (LO) covered:

201 Ibid 86
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KT0202 Criteria for creating specifications
IAC0202 Describe the importance of specifications for products and services in
contracts with external customers and suppliers, with specific reference to
conformance and output-based approaches and the role of key performance
indicators (KPIs)

The importance of specifications for products and services in contracts with external
customers and suppliers, with specific reference to conformance and output-based
approaches and the role of key performance indicators (KPIs)

The Shorter Oxford English Dictionary defines specifications as a detailed description of the
dimensions, construction, workmanship, materials etc., of work done or to be done,
prepared by an architect, engineer etc.202

Product specifications are defined as “written statement of an item's required
characteristics documented in a manner that facilitate its procurement or production and
acceptance.”203

Product specifications are required across all industries and may manifest differently
depending on the type of industry. For the more technical fields, drawings as well as the
detailed description of the planned project will be required. For others, it refers to the exact
quality and type of materials or fabrics that will be required. What is important is that the
specifications be in depth and complete. Below are reasons for product and service
specifications in contracts with customers and service providers:204

1 – It provides a clear definition

As a supporting document, the specification is a company’s opportunity to make its
requirements on a project clear. A good specification must give a clear indication of the
levels of quality the company expects the types of materials it wants to be used on the job
and how they should be installed, finished, or tested. The specification also provides the
company with an opportunity to refer to specific local standards that are applicable to the
job. This ensures that nobody is in any doubt as to what kind of compliance is required.

2 – Support the company’s drawings

Drawings on their own are not able to convey all a company’s requirements. Where a
company supports drawings 205with a comprehensive and detailed specification this will
save it time and effort in the long run. Regardless of the type of projects, for example
construction, where a fully rendered building may contain lots of additional information

202 https://www.thenbs.com/knowledge/15-reasons-why-specifications-are-still-important 29 April 2019.

203 Business Dictionary, Product Specifications, http://www.businessdictionary.com/definition/product-specification.html

29 April 2019.

204 NBS, 10 reasons you should write a specification; https://www.thenbs.com/knowledge/10-reasons-you-should-write-a-

specification 29 April 2019.

205 These can be either hand-drawn or developed as 3D CAD.

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within the individual objects that make up the model, there is still many other details that
need to be captured.

These include the quality of materials the company expect to be used, workmanship and
any relevant standards that need to be met. In the past it was not possible to write a
specification on the drawings themselves. It is now not only possible but with so much
information required a specification really is the only way to properly capture this
information.

3 – Information to ensure accurate pricing

Even though the specification itself will not include cost information, if it is well-drafted and
suitably detailed, it will make it easy for a contractor to price the job quickly and accurately.

It is important that a company provide detailed information about project requirements and
even specific products. At the core, expectations on performance and minimum operating
standards that need to be achieved will result in more accurate pricing being done.

4 – The ability to minimise risk

Codifying requirements in a specification makes it harder to dispute things later. A
specification that draws on relevant and up-to-date standards and which accurately
references the drawings should help a company minimise risks of dispute and legal action
on a project. Where a company finds itself in the unfortunate situation where there is a
dispute regarding a project or contract and it has its specifications specific on hand, it will be
in a far safer position 206.

5 – The ability to improve compliance

Timely and efficient statutory compliance will help a company to avoid legal implications
and penalties on a project. It also reduces the risk of prosecution. By defining requirements
on a project when it comes to meeting specific standards, sustainability benchmarks and
compliance with health and safety requirements, a project manager can easily check and
confirm that the documented requirements have been met.207

6 – Clear instructions for those delivering your project

A good specification can serve as an 'on-site instruction manual'. Where a company clearly
states the standards that it expects for the workmanship to be completed to, it is
effectively providing instructions for those working on the job to follow. It is important to
remember that the specification should not be unduly prescriptive when it comes to
delivery. The focus should clearly be on outcomes instead of the process by which the
outcomes are achieved. As an example, if this, a dirt-free carpet would be an
outcome, vacuuming the floor a stipulation on how the outcome should be achieved. This
process does not need be detailed in the specification.

206 The assumption made here is that the specifications are indeed accurate. 88
207 Ibid
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As a document at the heart of the project the specification should be available on-site208 as
a reference guide for contractors detailing the types and quality of materials, products, and
workmanship you require on the project.

7 – The security that comes from being legally binding

In addition to the specifications protecting a company from risk because the specification
forms part of the contract documentation they become legally binding in the event of any
dispute or litigation.

8 – An assurance of client satisfaction

The specification is an interpretation of the initial brief provided by its client. It serves as a
written interpretation of that brief. By ensuring that the company has fully understood the
client's wishes and the assets that they require, it serves as a key check on performance
criteria.

9 – A resource for facilities management

The specification does not stay as a static document. In some sectors, such as construction,
it will develop and evolve across the project timeline. The company will eventually end up
with an "as built" version that represents the final asset.

The specification will prove very important for facilities managers and maintenance teams
as it provides critical information about the building or asset when it transitions into use,
re-use and even through to demolition.

10 – Saves you time and money209

Taking the time to put together accurate information, clear instruction and minimal
repetition will allow the supplier to proceed with little interruption. There will therefore be
a reduced need for questioning and clarification, all of which add time and costs to a project.

Outcomes Based Specifications

Michael Porter has been quoted as saying that value should depend on results, not inputs,
so value in the sphere of supply chain management should be measured by the outcomes
achieved.210 This principle is further supported by the EU approach to value-based
procurement: MEAT (most economically advantageous tender), which emphasises the
outcomes that matter for the system, leading to evaluation of that value vs. cost.

This has been a critical shift, especially when companies seek to address problems for which
there is no known solution. Traditional competitive procurement documents include

208 Where the project is construction. Regardless of the nature of the project the specifications should remain on site for

close consultation.

209 Ibid

210 HSCN, Outcomes-based specifications Guide 2018,doc, http://hscn.org/Data/Sites/12/documents/hscn-ipt-outcome-

based-specification-guide-october-2018v1.pdf 29 Aril 2019

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requirements about the equipment, goods, or services: what is to be procured, how it is to
be delivered or performed, etc.

These requirements usually take the form of detailed technical specifications. These may
limit options and result in incremental improvements rather than innovative solutions.
Traditional procurements often result in decisions based on the lowest price, because
evaluation criteria are too narrowly defined to impact the award. Outcome based
specifications require a new approach to evaluation. They use criteria that assess value,
ability to achieve performance metrics, risk, and reward etc. rather than the ability to meet
narrow technical specifications211

Outcomes based specifications (OBS) are defined as specifications that describe the function
or performance that a solution for example equipment, goods, or services must fulfil for the
stakeholders; in other words, what the solution should do. This type of specification should
preferably be concise and allow for flexibility in determining how a specific need can be met.
Proper OBS should be written in performance terms. This focuses on the function of the
solution required. By describing what is to be achieved rather than providing a fixed
description of exactly how it should be done, OBS encourage innovation in the marketplace,
because it allows the relevant parties to propose new and transformative solutions. Overly
prescriptive requirements can stifle a company’s ability to offer innovative solutions.

In any innovation procurement, the specifications should permit a range of solutions. This
balances achievability with current or future capabilities. Outcomes based Specifications are
also known as performance-based outcomes.212

Put more simply:

a. A PBC or OBS must describe the owner’s needs in terms of what is to be achieved,
not how it is to be done. 213

b. Rather than micromanaging the details of how the contractor operates, the owner
should set the results and give the contractor the freedom to achieve them in the
best way.

c. Specification should focus on:214

 Outcomes not inputs.

 Results of the contractor’s work not on the work itself

d. Outsourcing enables the owner to concentrate on their core business. Performance
based contracting gives the contractor room to bring their extensive experience
and cutting-edge technology in their core business to an organisation.215

Advantages of Performance contracts or OBS216

211 Ibid at p1

212 Facilities America, Performance -based contracting, https://www.feapc.com/wp-content/uploads/2015/09/Facilities-

America-2015-9SEP15.pdf 29 Aril 2019.

213 Ibid at p5

214 Ibid at p6

215 Ibid at p9

216 Ibid at p10

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a. Reduces maintenance costs through the application of more effective and efficient
technologies and work procedures.

b. Improved control and enforcement of quality standards
c. No detailed specification or process description needed. Companies do not need to

be proficient at how to get what they want. Rather, they need to be proficient at
knowing what they want.
d. Contractors have flexibility in proposing solutions.
e. There is contactor buy -in and shared interest.
f. Surveillance is less frequent but more meaningful.
Disadvantages to Performance Contracts 217
a. It is more challenging to develop and implement OBS because it needs a paradigm
shift.

b. Organisations need to be skilled in the methodology for arriving at measurable
metrics and acceptable quality levels when developing the performance work
statement (PWS) or statement of work (SOW).

c. Administering PBC or OBS also requires a paradigm shift for the organisation.

Conformance

It is defined as” the fulfilment of a product, process, or service of specified requirements.
“218Conformance testing is a method of checking the implementations of a specification to
check whether there are deviations from the specification. Conformance is usually
mentioned and laid out in a conformance clause within a specification.

Conformance Clauses

Every specification must contain a conformance clause. The conformance clause is a part or
collection of parts of a specification that sets out the requirements, criteria, or conditions
that must be satisfied by an implementation to claim conformance. The conformance clause
lays out what must conform and how conformance can be met. Typically, the conformance
clause is an advanced description of what is required of implementers and applications. It
may point to other parts of the standard. It may also specify sets of functions. These may
take the form of profiles, levels, or other structures. It may set out minimal requirements for
certain functions and for implementation-dependent values. In addition, it may specify the
permissibility of extensions, options, and alternative approaches and how they are to be
handled.

Rationale for a Conformance Clause
A conformance clause:

217 Ibid at p11

218 Conformance requirements, https://www.oasis-open.org/committees/download.php/305/conformance_requirements-

v1.pdf29 April 2019.at pp 6 -8

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• Helps promote a common understanding of conformance and what is needed to
claim conformance to a specification,

• Helps ensure consistent application of conformance within a specification,
• Helps ensure consistent application of conformance across related specifications,
• promotes the ability to exchange and use information and open interchange,
• encourages the use of appropriate conformance test suites, and
• ensures uniformity in the development of conformance test suites.

Conformance key Words219

There are specific words that are used throughout the specification to indicate whether
requirements are mandatory, optional, or suggested. Using these key words helps to
identify the testable statements in a specification. Although the key words used within the
ISO/IEC 220community differ from the key words used within the IETF communities, they
achieve the same results.

“Use of these key words SHOULD be consistent (i.e., use the ISO key words or the IETF key
words, but do not use both).

ISO Key words:

SHALL – to indicate requirements strictly to be followed to conform to
the standard and in which no deviation is permitted.
Equivalent expressions include - is to, is required to, has to, it is
necessary. Do not use MUST as an alternative for shall:

SHALL NOT – converse of SHALL.

SHOULD – to indicate that among several possibilities one is
recommended as particularly suitable, without mentioning or
excluding others.

SHOULD NOT – converse of SHOULD.

MAY – to indicate a course of action permissible within the limits of
the standard. Equivalent expressions include is permitted, is
allowed.

NEED NOT – to indicate a course of action is not required.

CAN – statement of possibility and capability, whether material,
physical, or causal. Equivalent expressions include be able to, it
is possible to.

CANNOT – converse of CAN.

IETF Key words (RCF2119)

219 Ibid

220 These speak to the relevant international standards. IEC stands for the International Electrotechnical Commission, while

the IETF community is the Internet Engineering Task Force.

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MUST – the requirement is an absolute requirement of the
specification.

MUST NOT – the requirement is an absolute prohibition of the specification.

REQUIRED – see MUST.

SHALL – see MUST.

SHALL NOT – see MUST NOT

SHOULD – there may exist valid reasons in specific circumstances to
ignore a particular item, but the full implications must be
understood and carefully weighed before choosing a different
course.

SHOULD NOT – there may exist valid reasons in particular circumstances when
the particular behaviour is acceptable or even useful, but the
full implications should be understood, and the case carefully
weighed before implementing any behaviour described with
this label.

RECOMMENDED – see SHOULD.

MAY – the item is truly optional. One vendor may choose to include
the item because a specific marketplace requires it or because
the vendor feels that it enhances the product while another
vendor may omit the same item. An implementation that does
not include a specific option MUST be prepared to
interoperate with another implementation that does include
the option, though perhaps with reduced functionality. In the
same vein an implementation, which does include a specific
option MUST be prepared to interoperate with another
implementation that does not include the option (except, of
course, for the feature the option provides).

Additionally, key words include:

NORMATIVE – statements provided for the prescriptive parts of the
specification, providing that which is necessary to be able to
claim conformance to the specification. Note: the conformance
scheme of a specification j allows claimants to exempt certain
normative provisions as long as the claim discloses the
exemption.

INFORMATIVE

(NON-NORMATIVE) – statements provided for informational purposes, intended to
assist the understanding, or use of the specification and shall
not contain provisions that are required for conformance. “

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General Principles221
A goal of any conformance clause and its related conformance statements is to provide
clear and unambiguous statements. This enables the reader to know what is required in
order to claim conformance and what is optional.

An example of such a conformance statement would be:

“To achieve this objective: normative and informative sections SHALL be evident and, if
necessary, labelled accordingly, uniformity of structure, of style, and terminology SHALL be
maintained within the specification, identical wording SHALL be used to express identical
provisions and analogous wording SHALL be used to express analogous provisions.”

The development of the specification detail is important as it ensures consistency on pricing,
product quality, operational functionality and products are fit for purpose. This reduces the
financial impact of the wrong specification further down the line. This is also a fair process
for suppliers to make sure that they are quoting on a like-for-like basis.222

The Role of Key Performance Indicators
Key Performance Indicators, or KPIs, help contract managers measure progress and achieve
goals against contracts. When designed and used correctly, KPIs play a role in driving actions
and can have significant effects on results and projects.

Contract KPIs can be grouped into several categories, of which the most useful tend to be
Contract Value, Contract Incidents, Contract Monitoring, and Contract Renewal. According
to The KPI Institute, several specific KPIs from within these categories stand out as the KPIs
to actively monitor.223

1 – Annualised Contract Value (ACV)

ACV is useful with high-renewal rates because it aggregates the value of all recurring
contracts. It is also useful when comparing rates of, and revenue from recurring contracts
against new contracts and against lost revenue because of non-renewed contracts.

2 – Terminated Contract Remaining Value (TRV)

TRV is especially useful with service contracts. It helps companies prevent lost revenue by
highlighting outstanding bills, unbilled amounts, and credit amounts. It is also a helpful
indicator in highlighting contract performance when used together with rates of terminated
contracts against existing contracts.224

3 – Order Value Variance from Original Contract Value (OVV)

221 Ibid

222 CIPS, Specification Development, https://www.cips.org/en-ZA/knowledge/procurement-topics-and-skills/understand-

need---market-and-options-assessment/setting-kpis/ 29 April 2019

223https://www.contractworks.com/blog/6-kpis-to-measure-the-performance-of-your-contracts 14 January 2018

224 Ibid

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OVV can point out areas needing improvement, for example, client communication and
contract goal assessment. It includes those changes due to errors, changes of scope, and
existing conditions that could have been discovered.

Generally, a value of less than 5% is acceptable, while a value greater than 10% is
considered failing.

4 – Vendor Fraud

This KPI is vital for increasing awareness and detecting unnecessary costs. It is also used to
measure the effectiveness of risk management. A 2010 survey by the Association of
Certified Fraud Examiners indicated that on average, fraudulent activity goes undetected for
18 months. Furthermore, 24% of reported fraud involve billing schemes. The Vendor Fraud
KPI allows a company to discern the best methods for detection and prevention, the stage
of the contract most vulnerable to fraud, and the most effective defences against fraud.

5 – Compliance

Contract compliance is key to effective contracting. According to Industry Week,
organisations with a well-defined contract compliance process achieve up to 80% in savings
when compared with other organisations. The indicator provides insight into whether your
organisation needs improvement particularly with contract repository and contract
management.225

6 – Quality/Complaints Resolved

Quality is simpler to calculate in a manufacturing-related contract, where the measure is
usually defects per million, and the trend over time highlights improvement, or the lack of.
The measure, however, is harder to define with a service contract. One approach is to
employ a percentage of valid complaints resolved and time to final resolution.
In summary, KPIs provide powerful tools to achieve contract success. Generally, they are
effective when designed behind specified objectives. One approach is to create 3-5
categories of key objective areas, like those listed above, and then to build KPIs within those
categories.

KT0203: Sourcing of supplies

Knowledge Theory (KT) and corresponding Internal Assessment Criteria (IAC) / Learning
Objectives (LO) covered:

KT0203 Sourcing of supplies
IAC0203 Discuss the role of surveying the market and its relevance to the supply chain
function
IAC0204 Explain the use of e-sourcing technologies
IAC0205 Discuss the relevance of measuring supplier performance to the supply chain
function

225 Ibid 95
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IAC0206 Illustrate the potential impact of queries and clarifications on the supply
chain
IAC0207 Identify the possible impact of mistakes and delays on the supply chain
IAC0208 Discuss the use of reverse auctions/e-auctions

The role of surveying the market and its relevance to the supply chain function.

The primary purpose of conducting a supply market analysis is to develop the intelligence
needed to make to drive better procurement decisions. Creating an overall analysis of the
supply market can be more easily understood and executed by first understanding the key
elements of the supply market which need to be examined. 226Identifying and organising a
company’s intelligence needs makes data collection easier. These subsequently collected
elements can then be summarised into the final report as section headings.

Develop Commodity Profile

The Commodity Profile section of the supply market analysis gives the reader a clear
understanding of what specific product or service is being examined. It also defines the
scope of the analysis.

Key information to be collected and reported within this section include: Product
Classification (SIC, NAICS, UNSPSC),227 Commodity Description, Market Size and Growth Rate,
Market History, and CTQ (Critical to Quality) Factors228. The CTQ information should be
specific to the organisation’s needs and is vitally important in both determining cost
structures and researching suppliers.

Valid sources of information to be used in developing the commodity profile include
supplier interviews and site visits, internal subject matter experts, trade journals and
magazines, presentations from industry trade conferences and investment analysis reports
from the company broker. The great reliance by business on email, fax and internet has
provided the supply chain professional with an amazing opportunity to create a competitive
advantage in this area. This can be done by talking to people and conducting interviews with
published authors, suppliers, and subject matter experts.

Determine Cost Structure229

Much has been written about both the importance and the methods which can be used to
assess supplier costs. The fundamental information needed to understand supplier costs are
mostly standard throughout the world.

226 Hargraves D, Supply Market Analysis for a Competitive Advantage,

https://www.instituteforsupplymanagement.org/files/Pubs/Proceedings/DCHargraves.pdf 14 January 2018

227 SIC and NAICS are Standard Industrial Classification four-digit codes and the North American Industry Classification

System, which uses six-digit codes. UNSPSC is a Standard Products and Services Code is a scheme of classification of

products and services used in E Commerce., SIC and NAICS Codes. University Library System (ULS)

http://www.library.pitt.edu.sic

228 Critical to quality factors: the internal critical quality parameters that relate to the wants and needs of the customer;

https://www.isixsigma.com.dictionary

229 Ibid

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They include material cost, labour, transportation, energy, overhead and so forth. Economic
Census Reports are produced by the government and organised by six-digit NAICS code.
These provide some limited information, but true understanding requires deeper research.
It is a best practice in this area to use published financial statements and the notes section
of supplier annual reports in developing cost profiles.

In addition, by reviewing presentations given by the supplier to the investment community
and attending scheduled conference calls where financial performance is discussed can
reveal information that the supplier would be less likely to provide in an interview with a
supply chain professional.230

Research Suppliers

Understanding the structure and history of the supply base is fundamental to creating a
supply market analysis. Proper research in this area should begin with a clear statement on
the number of suppliers and whether the industry is fragmented or consolidated. It should
also include intelligence on the availability of low-cost country suppliers, possible supply
channels, geographic distribution of suppliers, and recent M&A activity. Internal sources can
be used to assist in supplier research. Internal subject matter experts may, however,
provide inaccurate or incomplete information regarding the supply base.

Over time, subject matter experts tend to unconsciously narrow their views to become
increasingly knowledgeable about ever more specific functions. They are therefore
frequently unaware about recent changes in the supply market or specific supplier
capabilities. Trade associations are a good source of information about an industry sector.
They are not however, a good source of information, for a particular company. Phone calls
to trade association staff members can often be productive and may lead to some
interesting interviews.

Also, some low-cost ways to get supplier identification started are to scan the Table of
Contents from published market research reports which are often available for preview on
the internet. One can also review supplier annual reports and investor reports for mention
of market share statistics and legal actions from competitors.231

Identify Key Market Indicators

Identifying the optimal market indicators for an industry, commodity, or area of spend is
vitally important and one of the most challenging tasks in the supply market analysis. The
importance of these market indicators is twofold:232

1. When seen at the time of the completion of the supply market analysis they can
provide insights into the current state of the market and may help codify early
research findings.

2. When tracked and viewed over time these indicators can provide the data needed to
identify seasonality, cyclicality and other market trends that repeat over time or
under certain conditions.

230 Ibid 97
231 Ibid
232 Ibid

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It is this second use that enables the analyst to create an early warning system to provide
indication of potential future shifts in the marketplace that could affect pricing or continuity
of supply.

Most market indicators are free and readily available, although some paid services include
specific commodity price information not available publicly. To help guide the research, it
may be useful to segment market indicators into four primary categories as below:

• Economic Indicators: These are the most high-profile indicators as they track
pricing, employment, and production rates in aggregate.

• Pricing Indicators: These include traditional pricing indices such as CPI (Consumer
Pricing Index), PPI (Producers Pricing Index) and U.S. Import and Export Price
Indexes.

• Employment Indicators: Include the rate of new unemployment claims and
number of people with jobs.

• Production Indicators: Includes gross domestic product (GDP), industrial
production, capacity utilisation, and inventories included in this list of key market
indicators for the area of research should be the additional information sources
which best track demand side information such as demand drivers, largest
consumers, and emerging demand trends.

How Supply Market Analysis Provides a Competitive Advantage

1. Supply market analysis, when used within a globally aligned strategic sourcing
process, can allow an organisation to establish and maintain a competitive edge
while also reducing supply risk.233

2. A supply market analysis can help reduce risk through knowledge of the supply
market dynamics and supply base composition. Where a company develops a
comprehensive understanding of the number, type and structure of suppliers, risk
of supply interruption can be minimised by analysing supplier size and capabilities
to an organisation’s CTQ needs. Examples of this would include identifying heavily
concentrated supply markets with few suppliers able to meet a company’s needs,
or highly fragmented supply markets where suppliers are smaller and more likely to
suffer supply interruptions due to financial instability.

3. In addition to these suppliers-based risk reduction opportunities, identifying and
tracking key market indicators can allow a company to more accurately anticipate
market moves and develop improved alternative supply strategies and risk
mitigation plans.234

4. The knowledge gained through completion of a supply market analysis will provide
the intelligence needed to identify optimal sourcing strategy options and can
provide cost structure insights to help determine if a company is purchasing at the
best possible price.

233 Ibid 98
234 Ibid
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5. Market indicators not only provide clues as to the best time to make purchases but
can also give advanced warning of coming events which may affect supply
continuity or change the balance of buyer/supplier power.

6. Key indicators can also be written into contracts with specific allowances for
fluctuations in the market during the term of the agreement.

Developing supply market analysis within a strategic sourcing framework, coupled with
strong primary research skills and the tracking and trending of key market indicators, can
provide both the organisation and the supply chain professional with a competitive
advantage.235

Explain the use of e-sourcing technologies.

What is e-Sourcing?
According to the Chartered Institute of Procurement and Supply 236 e-Sourcing is “the
sourcing process enabled with the appropriate web-enabled, collaborative technology to
facilitate the full life-cycle of the procurement process for both buyers and suppliers.”
E-Sourcing is also defined as” internet-enabled applications and decision support tools that
facilitate interactions between buyers and suppliers using online negotiations, online
auctions, reverse auctions and similar tools”237.
Put simply, e-Sourcing is the process of obtaining bids from different suppliers via a single
online portal. E-Sourcing is therefore simply sourcing with the addition of technology, such
as the internet and software, to carry out most of the processes involved. E-Sourcing is
mostly associated with online auctions. These enable prices reductions by introducing the
element of competition. This often takes the form of dynamic negotiations, in real time,
between a buyer and a group of pre-qualified suppliers, each competing against each other
to win the buyer, using a B2B 238sourcing platform.
They are visible, clearly structured and make the procurement process transparent239.240
Many companies are making significant investments in e-sourcing tools to boost supply
chain management (SCM) productivity and effectiveness.241

This helps businesses more easily keep track of their suppliers and provides more
visibility into their procurement operations. e-Sourcing has become a key procurement tool,
allowing companies to connect, screen and shortlist suppliers, irrespective of whether they
are present at the same location or at the same time. This often allows category managers

235 Ibid 99
236 www.CIPS.com
237 KBmanage, E=Sourcing, https://www.kbmanage.com/concept/e-sourcing 30 April 2019.
238 Buyer to buyer
239 Engelbrecht-Wiggans and Katok, 2006
240 https://www.kbmanage.com/concept/e-sourcing 14 January 2018
241https://www.sdcexec.com/home/article/10289738/esourcing-tools-means-to-an-end 14 January 2018

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