1. CSCMP SCPro Fundamentals Exam Review Session
Strategic Procurement

2. Learning Block 1: Supply Management and Procurement Overview

3. Procurement vs. Purchasing
A process that involves the acquisition of property, plant and/or equipment, goods, works, or services through the purchase, hire, lease, rental, or exchange from any source other than the buying organization.
Purchasing:
Largely a transactional activity of buying needed goods or services. This involves placing and processing purchase orders (POs) or requisitions.

4. Benefits of Procurement
Cost Reduction: Some organizations spend up to 50% or more of their own revenue on the purchase of raw materials, work in process, finished goods, spare parts, services, and other goods needed to keep organizations running.
Quality Improvement: The quality of raw and other materials used in producing goods affects the quality of the end products.
Product Enhancement: Improve products and process designs by helping introduce new technologies into companies’ product and service offerings.
Work with internal and external engineering personnel and suppliers to improve product reliability and performance while also reducing costs.

5. Procurement Functions
Goal: Purchasing materials and services at the lowest total cost possible while ensuring the required quality levels and meeting the needs of internal and external customers.
Supporting Operational Requirements
Working with Other Functional Groups
Procurement and Operations?, Procurement and Quality Assurance?
Managing Suppliers
$upporting Organizational Goal$ and Objective$
Developing Sourcing Strategies

6. Procurement Functions
Goal: Purchasing materials and services at the lowest total cost possible while ensuring the required quality levels and meeting the needs of internal and external customers.

7. Roles and Activities Performed by the Procurement Function
Requirements Defined for Procurement
Identify Potential Suppliers
Initiate RFP/ RFQ
Place Purchase Order
Manage & Measure Supplier Performance
RFP/RFQ = Request for Price/Quote

8. Types of Buying Organizations
Commercial organizations
Governments
Institutions (private schools, hospitals)
Public organizations (railways)

9. Products and Services Purchased

10. Procurement Process Overview

11. Learning Block 2: Strategic Sourcing

12. Strategic Sourcing
The process of determining long-term supply requirements, finding sources to fulfill those needs, selecting suppliers to provide the services, negotiating the purchase agreements, and managing suppliers’ performance.

13. Company Strategic Goal Procurement Objectives
Strategy & Alignment
Procurement strategies must be linked to, and support, organizations’ strategies because obstacles in developing effective supply strategies often present themselves because of difficulties in translating organizational goals and objectives into procurement objectives. 
Company Strategic Goal
Procurement Goals
Procurement Objectives
Maximize Return on Spend
Consolidate spend with fewer Suppliers 
Reduce Supply Base by 20% and establish price target reductions of at least 5%
Improve Product Quality to end-item Customers
Improve quality of purchased materials
Implement Six Sigma TQM Programs at top 5 spend suppliers to achieve zero defects
Reduce Overall Expenses
Reduce expenses to optimize procurement
Analyze procurement process flows improve productivity by 10%
Concentrate on Core Competencies
Outsource noncore competency items to suppliers
Establish a formal "Make vs. Buy" process to identify core vs. noncore items

14. Portfolio Analysis
Classifying procurements into 4 categories

15. Strategic Sourcing Process1
Define Business Requirements Using Commodity Strategies 2
Define the Strategic Importance of the Product and/or Service Procured 3
Determine Business Requirements and Conduct a Market Analysis 4
Set Goals and Conduct a Gap Analysis 5
Develop Sourcing Strategies and Objectives 6
Carry out the Strategy 7
Monitor Results and Review Performance

16. Sourcing Strategies Supply Base Rationalization
Determine best values and appropriate number of suppliers for all commodities
Total Quality Management (TQM) with Suppliers
Continuous improvement
Sourcing Globally
Quality, price availability
Long-Term Supplier Relationships and Supplier Development
Building up supplier to support business
Early Supplier Involvement in Design
Total Cost of Ownership (TCO)
Price plus additional costs expected during ownership
E-Procurement

17. Learning Block 3: Supplier Identification and Evaluation

18. Supplier Selection Key Procurement Trends:
Companies are relying on fewer suppliers
Increased use of long-term contracts with suppliers
The cost of making incorrect decisions when it comes to suppliers selection can have long-lasting consequences
Not all supplier identification and selection warrant comparable effort.

19. Supply Market Intelligence (SMI)
Commodity Profile Information: The type and nature of products or services, and quality requirements or standards.
Cost Structure Information: The costs associated with capital investment, raw materials, manufacturing, quality, storage, transportation, duties, export control, inventory carrying, taxes, insurance, port of entry, supplier development, energy, overhead, and profit.
Supply Base Information: Current and potential suppliers, supplier characteristics, and country location.
Market Information: Information identifies supply and demand price drivers, capacity utilization, and other factors that determine price and availability for the commodities in question, as well as the market size and predicted growth rate.
Competitive Analysis Information: Analysis is for buyers’ and suppliers’ relative size and buying power; substitute products and services; other customers using the same sources of supply; and other factors that influence buying leverage.

20. Uses, Categories and Levels of Market Intelligence
Macroenvironmental Level: Information from this level includes market dynamics, world trade, demographics, political climate, economics, environment, and technology.
Country Level: Subset of the macro-environmental level, with some additional topics included: cultural issues, levels of crime, logistics infrastructure, natural geography and size of country, safety of intellectual property, political climate and stability, national holidays, working hours, and time differences.
Industry and Commodity Level: Relates to the types, sizes, and relative strengths of industries that exist and the worldwide users and suppliers of commodities.
Supplier Level: Next level of SMI and relates to the number of potential suppliers that exist, the products and services they provide, their location, relative size, and their capabilities.

21. Supplier Evaluation
Goals: Identify suppliers who can become a source of competitive advantage, reduce risk, maximize value
Location
Environmental regulation compliance
Cultural and language differences
Financial stability
Infrastructure and assets
IT capability
Working conditions
Suppliers’ supplier network
Management capability
Employee turnover
Employee capabilities
Citations and awards
Cost structure
Evaluation of customer base
Quality capabilities
Process and technological capability

22. Global Supply Management
Primary reason is to obtain lower prices
International purchasing can result in cost savings, but there’s a lot more to consider
At least a quarter of the unit cost savings, disappears, on average, when estimating the total cost of purchase ownership
Many companies classify suppliers based upon geographic capabilities
Local, domestic, regional, multi-regional, and global

23. Learning Block 4: Supplier Negotiation and Contracting

24. Global Supply Management
Primary reason is to obtain lower prices
International purchasing can result in cost savings, but there’s a lot more to consider
At least a quarter of the unit cost savings, disappears, on average, when estimating the total cost of purchase ownership
Many companies classify suppliers based upon geographic capabilities
Local, domestic, regional, multi-regional, and global

25. Buyer-Seller Negotiation
Negotiations are typically used when the following criteria occur:
Contracts involve a large amount of money (i.e., high value)
All parties involved must agree on nonprice issues
Purchase requirements evolve or are technically complex
Buyers want to formalize continuous improvement requirements as part of a contract
Contracts cover more than one year
Suppliers are asked to perform services involving a detailed statement of work (SOW), such as product design or inventory management support

26. Contract Steps Identify or Anticipate a Purchase Requirement
Ensure Attributes are Defined
Communicate Attributes to Supplier(s)
Determine if Negotiation is Required
Plan for the Negotiation
Conduct the Negotiation
Execute the Agreement

27. Planning Pitfalls Not devoting sufficient time
Not establishing clear objectives
Not developing convincing arguments
Not having sufficient support for positions
Not considering the other parties’ needs and/or positions
Not considering the ideal time to conduct the negotiation

28. Negotiations Strategies
Pre-determined approaches or prepared plans of action to achieve specific goals or objectives to potentially find and make agreements or contracts in negotiations with other parties.
Tactics
Short-term plans and actions employed to execute negotiating strategies.
Concessions
A demonstrated willingness to move away from a given position

29. Negotiation Power
Informational – using facts and data in negotiations, research total costs
Reward – one party has something the other party wants
Coercive – involves use of punishment, if overused it can lead to failed negotiations
Legitimate – based upon an individuals role or position within an organization (e.g. CEO)
Expert – Knowledgeable within a particular field (i.e. subject matter expert)
Referent – have attributes that attract other parties, (e.g. individual who is outgoing and charismatic)

30. Negotiation Tactics Silence – people are uncomfortable with silence
Use of Power – from any of the previous sources
Phantom Quotes – an unethical tactic used by buyers to drive down prices, a price that is always lower that what sellers might offer
Scarcity – Buy now or it might be gone
Low Ball – Sellers accept lower prices with the intent to raise them
High Ball – Open with an unrealistic offer and show willingness to compromise
Price Increase – Buy now or the price will go up
Best and Final Offer – Speaks for itself
Honesty/Openness – Shows a willingness for win-win

31. Win-Win & Win-Lose Win-Win Negotiations Win-Lose Negotiations
Are cooperative and collaborative rather than competitive against other parties
The value derived from negotiations and business relationships can increase
Each party obtains something of value out of the negotiation).
Win-Lose Negotiations
Negotiations in which the involved parties do not provide concessions to the other parties
They wish to derive all or most of the value from the negotiation— often at the expense of other parties.

32. Contracts and Contracting
Contract: an agreement that can be enforced in court and is developed by two or more parties, each of whom agrees to perform, or refrain from performing, an act or service now or in the future.
Specify performance to an agreed-upon level of quantity, quality, and cost
Include opportunities to create value for parties involved
Prevent or resolve disputes
Manage and mitigate risk
Provide legal protection to parties involved
Statement of Work (SOW): captures and acknowledges mutual agreement on the work activities, deliverables, and timeline that a vendor will execute against in performance of work for a customer. Usually includes detailed requirements, pricing, and terms and conditions.

33. Contract Management Good Practices
Identify Internal Customer Requirements During Contract Development
Enter into Agreements with World-Class Suppliers
Develop Complete Contracts Whenever Possible
Obtain Contract Performance Feedback from Internal Customers
Assign a Relationship Manager to Each Contract with Performance Accountability
Measure and Report Internal Customer and Site Compliance to Corporate Agreements

34. Contract Management Good Practices
Develop an Information System That Reports Prices Paid Against a Contracted or Baseline Price (e.g. price creep)
Measure Real-Time Supplier Performance Whenever Possible
Conduct Regular Contract Performance Review Meetings
Develop a Company-Wide Contract Repository
Benchmark Contract Management Practices Against Other Leading Companies
Double Translate Contracts Involving Foreign Suppliers

35. Learning Block 5: Procurement Execution

36. Purchasing Approval
Purchase Orders: the purchaser’s authorization used to formalize a purchase transaction with a supplier. The physical form or electronic transaction that buyers use when placing orders for merchandize.
Blanket Purchase Orders: an order customers make with suppliers that contains multiple delivery dates scheduled over a period of time, sometimes at predetermined prices
Item description
Ship‐to address
Material specifications
PO number
Quantity requirements
Order due date
Quality requirements
Name and address of purchasing firm
Price
Delivery date and method
Purchase payment terms

37. Executing Procurement Contracts
Release Purchase Orders
PO’s are released and orders are received
Orders are often transmitted electronically via EDI or the Internet
Procurement is responsible for monitoring open POs and expediting orders
Receiving Goods
Packing Slip: travels with the goods and is used to describe the contents of the shipment
Bill of Lading: the official contract of carriage containing the terms and conditions between suppliers and carriers
Discrepancy Report: Procurement or Inventory Management follows up on discrepancies between what is received and what was ordered

38. Evaluate Supplier Post-Purchase Performance
Have suppliers performed according to expectations?
frequency and nature of the evaluation must be decided,
Should be regularly carried out, along with feedback about performance.
Evaluations may include the following elements:
Weekly performance metric reports
Quarterly, mid-level review meetings for supply chain managers between buyers and suppliers
Annual, executive-level meetings about supply chain management between buyers and suppliers

39. Procurement Enablers
E-Procurement: Using the internet to make things easier, Usually better for low-impact or stationary items
Procurement Cards: Company credit cards, Low-cost, regular purchase – tracked electronically and no need for PO approval
Long-Term Purchasing Agreements: Purchasing agreements of a year or longer, Higher value and longer time that Blanket POs
EDI: Computer-to-computer communication
Electronic Catalogues: low-cost search capability, and, if users order directly from these catalogues, cycle times and ordering costs can also be reduced
Automation of Bidding: Bid packages and specifications are made available online in which bidders submit their bids and proposals, and the bid opening and award are communicated electronically

40. Procurement Documents
Documents that companies send to potential suppliers…
Request for Information (RFI): requesting key information, including products or services provided, length of time in business, and markets served.
Request for Bid (RFB): requesting them to bid on supplying products or services to requesting buyers.
Request for Proposal (RFP): requesting them to submit business proposals or work to be carried out for companies requesting the proposal.
Request for Quotation (RFQ): requesting quotations for products or services

41. Procurement Documents
Requisition: a request for products or services; it is submitted, approved then converted to a PO.
Requirement definitions: formal, clear definition of the products or services required
Sourcing information/justification: reasons for the procurement method and types of organizations from which required products and services can be sourced (e.g., if buying from a monopoly, which is a sole seller of certain goods or services).
Short list: list of candidates, normally potential suppliers, who have been selected for further review or for final consideration before awarding a contract.
SOW / Statement of Work: document that details the work activities and tasks suppliers must carry out, the products or services to be delivered, and a planned timeline for completion

42. Procurement Documents
Bill of quantities (BOQ): Used in offering, in which parts, materials, labor, etc., are listed. Contains the terms and conditions of the work to be carried out and itemizes work to enable suppliers to price the work for which they are bidding.
Amendments to solicitation documents: This comprises any changes and/or additions to the RFI, RFB, RFQ, or RFP,
Amendments to contracts: This includes any agreed amendments to contracts.
Offers received (technical and financial): The various offers received from potential suppliers to a request for tender and contain the necessary information about technical and financial capabilities and strengths of suppliers in relation to work required by buyers.
Evaluation report: Developed based on a review of the information by suppliers and comprises an assessment of potential suppliers’ capabilities about the work required or products and services to be provided.

43. Procurement Documents
Correspondence with contractor: Correspondence about the work to be carried out or the work being carried out as well as the products and services being provided.
Progress reports: Reports about progress in fulfilling the contract or proofs of delivery of goods and services at required times, in required quantities and at acceptable levels of quality.
Proof of receipt of goods: a document signed by buyers to indicate they have received the required goods.
Receipt and inspection reports: Reports about inspections carried out in goods delivered to buyers and about the quality of the goods received.
Proof of payment: Indicates that payments have been made to suppliers.
Supplier evaluation reports: Normally developed on a regular basis, and they indicate how well suppliers are performing in their contractual, and other, obligations.

44. Learning Block 6: Supplier Management

45. Measuring Supplier Performance
Why measure?
Helps managers base decisions on objective rather than subjective data
Motivates those being measured to act in certain ways
Helps identify performance areas in need of improvement
Identify rates of change over time, which helps predict future performance

46. Supplier Scorecards
Scorecard: a performance measurement tool use to capture a summary of KPIs of a company. Metric scorecards should be easy to read usually have indicators to flag when a company is not meeting target metrics.
Supplier Scorecard:
Report or system that measures suppliers’ performance
Costs, quality, delivery timeliness, performance area of interest
Types of Scorecards
Categorical – simple categorical checkoffs
Weighted point systems – variety of performance categories, weighted based upon importance
Cost-based systems – total cost of doing business, least used of the three systems

47. Managing Supplier Relationships
Broad-based management methodology describing how firms interact with their strategic supply bases
Types of Supplier Relationships
Counter-Productive - working against each other, neither party feels the need to take responsibility
Competitive - (AKA win-lose) Competing over fixed amounts of value, relationships should be competitive when many low-value, low-risk items are required by buyers
Cooperative - buyers and suppliers work together over a long period of time to achieve common goals (e.g. reduce costs, improve quality, improve delivery, etc.)
Collaborative - working with a limited group of suppliers that are strategically important to the success of buyers – sharing risks, rewards and resources

48. Supplier Development
Buyers’ efforts to improve the performance of their suppliers
In the past, companies would work with many suppliers – they then realized it was easier to manage 100 than 2000
More cost in switching suppliers
Most supplier development is reactive (fixing product defects)
Preferable to be proactive
Development techniques include:
Education and training programs
Information-sharing or financial support
Providing personal, process equipment or technology
Risks: possible financial commitments without ROI

49. Critical Factors in Development Success
Executive Commitment - Buy-in from the top
Trust-based Relationships - “If I give them this money, will it help me?”
Data and Measurement - Buyers must make informed decisions about where to invest
Commitment of Resources
Time
Credibility - Buyers must hold expertise in an area
Power Relationship - Usually a large buyer and small supplier

50. Learning Block 7: Procurement Organizations and Roles

51. Procurement Organization
Determinants of the way procurement functions are structured
Geography – companies may choose to place procurement professionals where their suppliers are located or where the headquarters/plant is located
Centralization – allows companies to specialize people, share resources, creating efficiencies of scale
Commodities and Commodity Councils – used by global or multi-divisional manufacturers to share supplier information
Procurement Function - Balancing local collaboration and leveraging specialized skills (Sourcing, Procurement, Supplier Management)

52. Procurement Organization
Embedded Services
Procurement specialist within the plant
Shared Services
Located within headquarters or regionally
Eliminates redundant roles and makes technology investment more worthwhile
Direct Spend
Purchase of goods directly incorporated into a product being manufactured
Indirect Spend
Goods not being put into products being made (computers, janitorial services, furniture)

53. Reporting Structures
Organizations that support integrated supply chain management often of a Chief Supply Chain Officer

54. Roles and Competencies
Below the executive level, a number of different roles exist:
Strategic sourcing managers / analysts – identify suppliers
Commodity managers / analysts – focus on one or more well-defined commodities
Procurement / purchasing managers, supervisors, coordinators – focus of the transactional elements of buying
Buyers and Planners – forecast demand, determine purchasing quantity and timing

55. Organizational Competencies and Talent Development
Analyst or Entry-level
Buyer / Sr. Buyer
Manager / Sr. Manager
Director / VP
Financial/Economic Analysis
Computer Analytical Skills
Problem Solving
Financial Acumen
Communication (written and verbal) Organizational Skills
TCO Knowledge
ERP Database Knowledge
Word, Excel, Access
Ethics/Integrity
Business/Financial Acumen
Communication and Presentation Skills
Relationship Mgt.
Strategic Thinking
Solid Negotiations Skills
Detail Orientation
TCO Skills
Issue Resolution
Project Management
Time Mgt. and Organizational Skills
Sourcing Expertise
Risk Management
Total Cost of Ownership Skills
Issue and Conflict Mgt.
Advanced Negotiations Skills
Decision making
Diplomacy
Influencing Skills
Team Leadership/People Mgt. (if Direct Reports)
Ethics Integrity
High Level Procurement Competency
Influence and Strong Leadership[ Skills
High-level Business and Financial Acumen
Comfort around highest levels of leadership in all areas
Complex Negotiation Skills
Decision Making
Conflict Resolution
Team Leadership
Risk Mgt.
Customer Focused

56. Procurement Metrics
Cost savings over time: savings that procurement has affected over time, including by commodity and in total
Percentage of overall organizational spend managed by procurement: indicates the level of compliance to procurement policies and perceived value of procurement functions by other parts of organizations
Contract compliance: indicates suppliers’ levels of following contract terms
Number of suppliers: the effectiveness of strategic sourcing and supplier management efforts

57. Procurement Metrics
PO Cost: a holistic cost that takes into account the labor and systems costs associated with elements of creating, managing, and closing out POs divided by the total number of POs
Defect Rates: percent of materials received from given vendors that do not meet the agreed-upon standards
On-time Delivery Percent: the number of vendor orders that are received at the time they were expected
Procurement Cycle Time: average time it takes between requisition submission and PO placement or a combination of administrative lead time and production lead time

58. Learning Block 8: Applications of Law and Ethics in Procurement

59. Agency Law
Laws about agency govern the relationship between parties in which one party (i.e., the agent) agrees to represent or act for another party (i.e., the principal)
For example, an overseas purchasing agent might have the legal authority to purchase goods and services on behalf of a buying principal in the US.

60. Contract Law
Contract law refers to how business firms enter into contracts with each other, execute contracts, and remedy problems that arise in the process.
Contracts can be oral, but written contracts are the evidence of the underlying contractual relationship.
Offer and acceptance: An offer is a proposal of a contract, relationship, or work to be done, and the acceptance is an agreement to the offer
Consideration: In the consideration, each party must agree to give up something of value during the compliance and performance of the contract.
Legality of subject matter: Contracts must only cover topics that are legal.
Legal capacity: Only individuals who are legally or mentally qualified to enter into a contract may do so (in purchasing, this deals with legal agency).

61. Contract Law 4 Major Legal Concepts:
To indemnify is to protect against and compensate for any damage, loss sustained, or expense incurred
Terms and conditions are the general and special arrangements, provisions, requirements, rules, specifications, and standards that form an integral part of an agreement or contract
Breach of contract involves the failure, without legal excuse, to perform the obligations of a contract
Intellectual property includes property resulting from intellectual and creative process, including patents, trademarks, and copyrights

62. Contract Law Domestic Contract Law
Uniform Commercial Code (UCC) = Applies to domestic contracts. Model code means that states do not have to follow it
Designed to facilitate and streamline contracts
International Contract Law
United Nations Convention of Contracts for the International Sale of Goods (UCC for International Contracts)

63. Purchasing Ethics
Ethics = are about the fairness, justness, rightness, or wrongness of an action
One of the challenges surrounding ethics is that no international agreement exists about what constitutes global, ethical behavior
Bribes are cultural norm in Greece, but jail-able offense elsewhere

64. Unethical Behavior in Purchasing
Personal Buying – personal, rather than corporate use
Financial Conflicts of Interest – Awarding business to friends/family members
Accepting Supplier Favors – Gifts, concert tickets, etc.
Sharp Practices
Bids from unqualified buyers to lower prices
Exaggerating purchase quantity to get lower quote
Taking advantage of suppliers in financial distress
Reciprocity – Buyers doing business with only suppliers that are customers

65. Means of Supporting Ethical Behavior in Purchasing
Management must create a culture that reinforces ethical behavior
Have corporate compliance programs and training available to employees.
Buying organizations may choose to rotate procurement personnel to avoid buyers becoming too comfortable with groups of suppliers.
Designate a corporate ombudsman, a person who investigates and attempts to resolve complaints, problems, and concerns