Definition of commercial relating to, engaged in or used for commerce. Profitable; having profit as the main goal”

Definition of commercial “1. Relating to, engaged in or used for commerce. 2. Profitable; having profit as the main goal”

• Definition of commercial “1. Relating to, engaged in or used for commerce. 2. Profitable; having profit as the main goal”

• (Collins Concise Dictionary)

• Definition of relationship “1. The state of being related....3. The friendship, contact, communications etc which exist between people”

• (Collins Concise Dictionary)

• Key points:

• Concerned with people, contact and communication

• Purchasing and supply relationships involve a degree of closeness

• Entered into for the purpose of mutual benefit

• Important to establish effective relationships with suppliers.

• The nature of an effective relationship will vary with circumstances and importance to the buying organisation of the supplier’s product or service

The buying organisation seeks to obtain the best price possible from the supplier

• The buying organisation seeks to obtain the best price possible from the supplier

• The buyer tries to squeeze the supplier’s profit margins

• Can be seen as a win-lose situation

• Should be professional and ethical

• Buyers may argue regularly with the supplier’s representatives & complain regularly about products or services supplied (some cases may mean relationship is adversarial)

• Associated with transactional purchasing

Benefits of doing business together arise from ideas of sharing as well as exchanging

• Benefits of doing business together arise from ideas of sharing as well as exchanging

• Buying organisation seeks to develop a long-term relationship with supplier

• Both organisations share common interests, both benefit from adding value in the supply chain

• Supplier participates with buyer looking for improvements and innovations

• Both parties jointly set targets for improvements in cost and quality

• Meet regularly to discuss progress

• Proactive relationship looking for improvements

• NOT a long-term COSY customer-supplier relationship

Competitive approach squeezes the profit margins of the supplier, and by doing so the buying organisation obtains some of the value that the supplier would otherwise keep for himself

• Competitive approach squeezes the profit margins of the supplier, and by doing so the buying organisation obtains some of the value that the supplier would otherwise keep for himself

• Developing collaborative relationships takes time and effort – unrealistic to try creating more of these relationships than a buyer can effectively manage

• Where a failure in supply would not be damaging it is not worth the time and effort to create a collaborative relationship

“ The good old-fashioned rottweiler approach to buying must co-exist with a more collaborative approach internally and externally......Adversarial relationships exist, and rightfully so. What is needed however is a balance between both approaches and a sophisticated understanding of which tactic to use to develop the strategic goals of the organisation”

• “ The good old-fashioned rottweiler approach to buying must co-exist with a more collaborative approach internally and externally......Adversarial relationships exist, and rightfully so. What is needed however is a balance between both approaches and a sophisticated understanding of which tactic to use to develop the strategic goals of the organisation”

• Mark Ralf, Strategic Procurement Management

• So why?

• Supply chains compete, not companies

• Most opportunities for reducing costs and enhancing value in the supply chain occur at the interface between supply chain partners

• Adding to the competitiveness of a supply chain calls for a value-added exchange of information between the supply chain partners

• The integration of the supply chain implies the integration of process in the supply chain

• Achieving supply chain competitiveness requires a collective determination of strategy by the supply chain partners

Supply partnerships are not a “cosy relationship” between customer and supplier. Whereas a partnership brings improvements to the supply chain, a cosy relationship does not

• Supply partnerships are not a “cosy relationship” between customer and supplier. Whereas a partnership brings improvements to the supply chain, a cosy relationship does not

When is a transactional relationship appropriate?

• When is a transactional relationship appropriate?

• Situations where the trouble and expense of developing a long-term collaborative relationship are not justified

• Nature of product being purchased (little or no strategic importance)

• Many suppliers exist

• Items purchased rarely

• Forced upon the buyer (product purchased is of high strategic importance to the buyer but of little importance to the supplier, who in these instances is usually larger than the buying organisation)

“Partnership sourcing is commitment by customer/suppliers, regardless of size , to a long-term relationship based on clear mutually agreed objectives to strive for world class capability and effectiveness”

• “Partnership sourcing is commitment by customer/suppliers, regardless of size , to a long-term relationship based on clear mutually agreed objectives to strive for world class capability and effectiveness”

• Defined by CBI and DTI

• Aim: “to bring about fundamental change in companies”

“The main goal of being “lean” is to obtain the same output from half the resources used by older methods – half the number of workers, half the number of design engineers, and half the level of inventory”

• “The main goal of being “lean” is to obtain the same output from half the resources used by older methods – half the number of workers, half the number of design engineers, and half the level of inventory”

• Saunders

• Daniel Jones identified five principles that characterised lean production organisations:

• Tasks and responsibilities are transferred to those who are actually adding value on the production line

• Discovering defects and problems immediately, and eliminating their causes, is an important objective of control systems

• Comprehensive information system enables everyone to respond quickly

• Organisation must be based on empowered work teams

• This in turn encourages a strong sense of reciprocal obligation between staff and employing firm

Based on the concept of eliminating waste

• Based on the concept of eliminating waste

• Waste is any activity that uses resources but adds no value

• Associated with the principles of (JIT) Just in Time manufacturing, also known as “lean operations”

• JIT was developed by Taichi Ohno in 1940s in Toyota
• Ohno identified “seven wastes”:
• Over-production
• Waste caused by transportation
• Waiting
• Motion
• Over-processing
• Waste caused by Inventory
• Defects/corrections

Operational requirements for JIT are:

• Operational requirements for JIT are:

• High quality (defects/errors reduce throughput and reliability of internal supply)

• Speed (throughput must be fast. Customer orders must be met by production and not inventory)

• Reliability (Production must be reliable, without hold-ups)

• Flexibility (meet customer orders quickly, production must be flexible, may mean small batches)

• Lower cost (as a result of improving quality and speed of throughput)

• “Just in time is a disciplined approach to improving overall productivity and eliminating waste”

• Voss, Just-in-Time Manufacture, 1987

Jidoka: the use of “intelligent machines”, ie machines that can measure quality of their own work and will stop if defined parameters are not being met

• Jidoka: the use of “intelligent machines”, ie machines that can measure quality of their own work and will stop if defined parameters are not being met

• Heijunka: the levelling of production to the market demand. This smoothing of production allows for maximisation of the lean supply philosophy

• Kaizen: the philosophy of continuous improvement, which underlies all the activities of lean production

Modern thinking has moved away from adversarial relationships

• Modern thinking has moved away from adversarial relationships

• Both buyer and supplier attempt to get the best possible deal for their respective organisations

• May be appropriate for tactical profit items

• Minimal amounts of trust, information exchange and flexibility

Similar to adversarial, but implies less direct contact between buyer and supplier

• Similar to adversarial, but implies less direct contact between buyer and supplier

• Purchases usually infrequent and are usually tactical profit or tactical acquisition items

• Buyers attempt to get the maximum benefit for their organisation

• Neither buyer or supplier will be motivated to provide anything for nothing

• Little need for regular contact

Applies to tactical acquisition quadrant (low risk, low value)

• Applies to tactical acquisition quadrant (low risk, low value)

• Buyer’s objective is to obtain item with as little cost as possible

• The deal could be long-term provided it works well for both

• Both parties are motivated to trust each other and perform their side of the bargain

Applies both to tactical acquisition and tactical profit items

• Applies both to tactical acquisition and tactical profit items

• Buyer identifies a supplier that performs well and engages more closely

• Both parties need to invest significant time and effort

• Buyer’s objective is to get supplier to do more, in terms of coordinating activities (while not paying more for his supplies)

• Relationships tend to be long-term and both parties work hard to achieve continuous improvement

Single-sourced – applies to low-cost items (tactical acquisition or strategic security). Buyer hopes to gain greater commitment and preferential treatment from the supplier by offering the supplier exclusivity

• Single-sourced – applies to low-cost items (tactical acquisition or strategic security). Buyer hopes to gain greater commitment and preferential treatment from the supplier by offering the supplier exclusivity

• Outsourced – Usually applies to strategic security items. Appropriate when buyer believes that a supplier can do something better than his own organisation. Expects cost savings or improved efficiency, plus freedom from managing service in-house

• Strategic alliances – Applies to strategic critical products. A buyer will ally himself with a supplier as he believes that they can work together to achieve long-term mutual benefits. Based on high levels of trust and mutual commitment

Suppliers already known to organisation from previous dealings can be evaluated on the basis of their track record. This type of evaluation is known as “vendor rating”

• Suppliers already known to organisation from previous dealings can be evaluated on the basis of their track record. This type of evaluation is known as “vendor rating”

• When the supplier is not known to the organisation there is a need to judge his capabilities in a different way and on the basis of different information such as:

• Financial stability

• Commercial capabilities

• Management skills

• History

• Who they trade with

Risk Management Process

• Risk Management Process

• Identify sources of risk

• May be predictable or unpredictable
• Arise within the organisation and externally

• For each possible event, determine its likelihood and its impact

• How often it is likely to happen and what would the impact be

• Assess the overall impact

• Attach a weighting factor to each
• Add up all weighting so overall risk can be assessed

• Investigate risk reduction

• Consider various things that could go wrong
• Take direct action aimed at reducing risk or transfer the risk
• Take out insurance

• Plan, control and reduce risk

• Assign task specifically to persons with appropriate responsibility

Intended to assist buyers in their professional work

• Intended to assist buyers in their professional work

• In order to apply, the buyer would need to evaluate which stage the relationship has reached

• Opportunity for forward planning (see what is yet to come and be prepared!)

Buyer has changed the type of products it makes or sells

• Buyer has changed the type of products it makes or sells

• Supplier makes a strategic shift into other supply markets

• Problems arise with the relationship (becomes “too cosy” or bureaucratic and inflexible)

• A new supplier enters the market, offering terms the existing supplier cannot match

• Dispute about quality of goods supplied

• Classified under three headings:

• Fulfilled objectives

• Disputes

• One party behaved badly

To achieve competitive prices companies must focus on costs. Purchasing’s contribution to reducing costs is throughout the supply chain, whilst maintaining quality

• To achieve competitive prices companies must focus on costs. Purchasing’s contribution to reducing costs is throughout the supply chain, whilst maintaining quality

• Traditional model builds the cost of a product by analysing its components step by step. Profit margin is then added

• Target costing starts at the other end. Manufacturer estimates the selling price (what the market would be willing to pay) then works backwards to calculate the production cost that must be achieved in order to provide reasonable profit

Agility is proficiency at dealing adequately with change or unexpected event, such as recovering from a situation where a supplier has failed.

• Agility is proficiency at dealing adequately with change or unexpected event, such as recovering from a situation where a supplier has failed.

• Unplanned events could be caused by:

• Staff shortages, breakdowns, delayed deliveries, urgent requirements

• To achieve agility calls for:

• Streamlining physical flows or parts from suppliers

• Streamlining the bilateral flow of information through EDI

• Adaptability in responding to changing needs of the market

Specify what creates value as seen from the customer’s perspective

• Specify what creates value as seen from the customer’s perspective

• Identify all steps across the value stream

• Perform those actions that create that value flow

• Only make what is pulled by the customer just in time

• Strive for perfection by continually removing successive layers of waste

“Using market knowledge and a responsive supply network to exploit profitable opportunities in the market place”

• “Using market knowledge and a responsive supply network to exploit profitable opportunities in the market place”

• CIPS

• Able to see opportunities for product modification

• Product lifecycles may be short (because organisation’s offerings change frequently in response to market demand)

• Late customisation

• Ready to accept stock

• Stock is seen as a source of value enhancement for the customer and not seen as cost

• Andrew Cox believes that the lean philosophy is powerful when key criteria are cost and quality, whereas agility is paramount where service and customer value enhancement are key

CSR is being a good corporate citizen. Some matters are covered by legislation:

• CSR is being a good corporate citizen. Some matters are covered by legislation:

• Legislative requirements (Health and Safety at Work Act)

• Regulatory requirements (Ofcom, Competition Commission)

• Professional codes of practice (CIPS, CIMA, CIM etc)

• Many organisations set social responsibility objectives in relation to:

• Sustainability issues
• Environmental issues
• Ethical trading

Why is it important to organisations?

• Why is it important to organisations?

• Enhances stakeholder values

• Helps to increase reputation

• Increases knowledge of supply, encourages minimal risk taking

Both customers and suppliers expect to see ethical behaviour (could lose business if deemed to be unethical)

• Both customers and suppliers expect to see ethical behaviour (could lose business if deemed to be unethical)

• Concern for the environment is just one aspect of ethical business policies

• Unethical behaviour is not beneficial in the long term

• Policies and ethical behaviour are considered to be an essential element in strategic management

• Buyers are more exposed to temptation than other professionals

Stakeholders can affect the success of a strategy

• Stakeholders can affect the success of a strategy

• Stakeholder interests must be considered when making decisions

• Examples of internal stakeholders:

• Production
• Quality control
• Research and development
• Warehousing and distribution
• Finance
• Sales and marketing

Organisation culture is:

• Organisation culture is:

• “a pattern of beliefs and expectations shared by the organisation’s members, and which produce norms which powerfully shape the behaviour of individuals and groups in the organisation”

• (Schwartz and Davies)

• or

• “ the way we do things around here”

Within a company can be expressed through:

• Within a company can be expressed through:

Definitions:

• Definitions:

• Appraisal – the assessment of potential suppliers, prior to contract award

• Vendor rating – the assessment of a supplier’s performance in fulfilling a contract after its award

• Supplier development – the activities carried out both before and after contract award; aim to assist a supplier in providing a service/product we need

Factors to be appraised in supplier appraisal:

• Factors to be appraised in supplier appraisal:

Features that a buyer is unable to influence:

• Features that a buyer is unable to influence:

Buyers are obliged to award the contract on the basis of the lowest quoted price, or on the basis of the economically most advantageous tender

• Buyers are obliged to award the contract on the basis of the lowest quoted price, or on the basis of the economically most advantageous tender

Debriefing

• Debriefing

• Results must be notified to the Office of Official Publications of the European Communities, which are then published

• Unsuccessful bidders have the right for a debrief, which must be undertaken within 48 days

Framework agreement is an agreement between one or more contracting authorities and one or more economic operators, the purpose of which is to establish the terms governing contracts to be awarded during a given period, in particular with regard to price and, where appropriate, the quantity envisaged.

• Framework agreement is an agreement between one or more contracting authorities and one or more economic operators, the purpose of which is to establish the terms governing contracts to be awarded during a given period, in particular with regard to price and, where appropriate, the quantity envisaged.

• Central purchasing body is a contracting authority which acquires supplies and/or services intended for contracting authorities or awards public contracts or concludes framework agreements for works, supplies or services intended for contracting authorities.

• Dynamic (electronic) purchasing system is a completely electronic process for making commonly used purchases, the characteristics of which, as generally available on the market, meet the requirements of the contracting authority, which is limited in duration and open throughout its validity to any economic operator which satisfies the selection criteria and has submitted an indicative tender that complies with the specification

Electronic auctions is a repetitive process involving an electronic device for the presentation of new prices, revised downwards, and/or new values concerning certain elements of tenders, which occur after an initial full evaluation of the tenders, enabling them to be ranked using automatic evaluation methods.

• Electronic auctions is a repetitive process involving an electronic device for the presentation of new prices, revised downwards, and/or new values concerning certain elements of tenders, which occur after an initial full evaluation of the tenders, enabling them to be ranked using automatic evaluation methods.

• Competitive dialogue was introduced to complement the existing open, restricted and negotiated procedures. Intended to be used for large complex projects in circumstances where, currently, the use of the negotiated procedure may be considered.

Intra-organisational trading refers to commercial relationships between entities which are part of the same organisation. It may be regarded as one variety of reciprocal trading, which means the practice of buying from a supplier simply because that supplier happens to buy from you.

• Intra-organisational trading refers to commercial relationships between entities which are part of the same organisation. It may be regarded as one variety of reciprocal trading, which means the practice of buying from a supplier simply because that supplier happens to buy from you.

• Problems with reciprocal buying:

• Brings into the buying decision factors that have nothing to do with the buyer’s principal duty, which is to secure the best possible value for his organisation

• Unsuitable purchase decisions are made which could result in a heavy price to pay in terms of product quality and customer satisfaction

• Possible breach of law (in the UK there are legal regulations which prohibit most attempts to stifle competition)

• Malcom Saunders suggests that three questions should be asked in analysing an opportunity for reciprocal trade:

• How necessary is it to have a reciprocal agreement with a customer in order to win the sales contract?

• What are the benefits to the company of winning the sales contract?

• What are the costs to the company of using this customer as a supplier, as opposed to exercising a free choice?

Cornelius and Faire suggest that there are three basic ways a conflict can be worked out

• Cornelius and Faire suggest that there are three basic ways a conflict can be worked out

• Win-Lose – one party gets what he wants at the expense of the other party. This may damage working relationship

• Lose-Lose – neither party gets what he really wants, compromise. Resentment may build on both sides

• Win-Win – both parties get as close as possible to what they really want. Generate more options, problem solving, open communication, enhanced cooperation and preserved working relationships

The more crucial the stakeholder the more important it is to involve him in detailed communication about strategies, policies, plans and procedures.

• The more crucial the stakeholder the more important it is to involve him in detailed communication about strategies, policies, plans and procedures.

Monopoly is a market where just one supplier exists. Doubtful whether any pure monopoly exists because there is almost always an alternative supplier (water comapnies)

• Monopoly is a market where just one supplier exists. Doubtful whether any pure monopoly exists because there is almost always an alternative supplier (water comapnies)

• Oligopoly is a market dominated by just a few large suppliers (telecommunications industry)

• Monopsony is a market in which just one buyer exists

Purchasers use internet for the following:

• Purchasers use internet for the following:

• Search suppliers’ catalogues

• Electronic ordering

• Payment by electronic funds transfer/purchasing cards

• Track shipments and receive delivery information

Precautions for a buyer:

• Precautions for a buyer:

• Ensure that service levels can be achieved by winning bidder

• Ensure that supply sources are secure

• Ensure that suppliers are educated in the use of e-auctions

• Ensure there is a good business case for e-auctions

• Gather detailed information for justification and planning of the auction

• Consider the challenges and risks likely to be faced, and make plans to manage them

• Consider in detail the financial and non-financial resources required to implement e-auctions, and the type of products best suited to them

Leading means making payment in advance of due date

• Leading means making payment in advance of due date

• Lagging means making payment later than the due date

• Forward exchange contracts remove uncertainty about future payments. Buyer agrees now with a bank to purchase the required amount of foreign currency at the appropriate date in the future. The buyer knows exactly how much it will cost

A multinational company is one that operates from bases in several different countries.

• A multinational company is one that operates from bases in several different countries.

• A global company sells to or buys from countries throughout the world

Examples of supplier development:

• Examples of supplier development:

• A buyer wants to use purchasing cards, supplier does not have capability. The buyer may purchase electronic terminals for the suppliers concerned

• A buyer pays for his supplier’s manufacturing processes to be updated, in return for discounted supplies in the future

• Why develop suppliers?

• Gain in terms of sharing in the specialist knowledge of the supplier

• Take advantage of the supplier’s capabilities to support a strategy of outsourcing non-core activities

• Improve the supply base so as to achieve better quality, delivery and price

Advantages:

• Advantages:

• Motivated suppliers can be encouraged to invest in research and development

• Use of multiple sourcing and competitive bidding. Process is streamlined and waste is avoided

• Long-term agreement means that the supplier’s production costs will fall as a result of the learning effect. Gives scope for price reductions

Supplier’s perspective of relationship with a buyer:

• Supplier’s perspective of relationship with a buyer:

• - Adherence to contract terms in relation to volume, required lead times, payment etc

• Operational efficiency in terms of scheduling

• A fair sharing of risks and rewards

• Being given an opportunity to perform well, without every minor problem escalated to the level of crises

A sponsor is chosen from among senior management team. His task is to support the implementation and operation of the measurement system by using his influence as a senior manager to ensure that it is taken seriously by all parties

• A sponsor is chosen from among senior management team. His task is to support the implementation and operation of the measurement system by using his influence as a senior manager to ensure that it is taken seriously by all parties

• A sponsor’s activities may include:

• Attend meetings relating to the measurement of performance

• Track progress of the performance measurement system

• Use his influence within the organisation to remove barriers

• Support the buying team in dealing with the supplier if there is failure to meet KPIs

• Report to senior management

An Account Manager ensures that a contract is performed to the required standard, meeting specifications, terms and conditions agreed between the buyer and supplier

• An Account Manager ensures that a contract is performed to the required standard, meeting specifications, terms and conditions agreed between the buyer and supplier

• Aspects of account management:

• Managing all aspects of the relationship between the supplier and the buyer’s customers

• Ensuring delivery of the goods and service from the supplier on the agreed terms and to the agreed standard

• Encouraging the supplier to adhere to agreed standards or KPIs and to seek improvements in performance throughout the duration of the relationship

Benefits of account management:

• Benefits of account management:

• Better control by the buyer over the execution of supply contracts

• Maintain communication, help to achieve better performance by the supplier

• Improvements in cost and quality, thereby adding value

• Foresee problems early and deal with them before they become serious

• Ensure buyer carries out its undertakings properly so difficulties with the supplier are avoided

Total Quality Management (TQM) is an attitude or philosophy. It focuses on small changes that can be recognised and dealt with at local level. An organisation should continually look for ways of achieving further improvement. The search for quality never ends.

• Total Quality Management (TQM) is an attitude or philosophy. It focuses on small changes that can be recognised and dealt with at local level. An organisation should continually look for ways of achieving further improvement. The search for quality never ends.

• Kaizen is a Japanese word meaning gradual and orderly, continuous improvement. A kaizen strategy involves everyone in the organisation working together to make improvements without any large capital investment. There are two elements to Kaizen: improvements and change.