Chapter 1Developing a business case

• HMT Green Book is the UK Government's best practice for producing business cases, based on a 5-case model
• The Commercial Case under the 5-case model applies most to procurement professionals.

RAQSCI Model

This model demonstrates what an organisation needs from its procurements:

This is in order: move from 1 → 6.

Difference between wants and needs: wants are nice-to-have, needs are musts.

3 types of purchase (recap of L4M1)

1. Straight re-buy
   Buying something that has been bought before with no change.
2. Modified re-buy
   Adapting the requirement and buying something that has been bought before.
3. New purchase
   Hasn't been bought before. It can range from low-value to high-value, but likelier to be high-value.
   • You might be buying the lower-value stuff regularly, but only buy high-value things occasionally
   • This is more complicated: you'd need to go through the entire procurement lifecycle
   • Offers procurement staff more opportunities to introduce new procurement practices, such as proper market research

The implications of the 3 types of purchases on RAQSCI are intuitive, but might be worth testing yourself.

Capital procurements

This type of asset will be the most long-term, and therefore you'll need to take a whole-life view.

• This imposes a lot of work when writing a business case, to evaluate the through-life benefits and costs

Writing a business case

A business case is used to articulate the benefits when weighed against costs, but also to encourage projects to be structured in a rigorous way, with the best option chosen.

The Management Case in the 5-Case Model (HMT Green Book) is also meant to set out how the project will be governed and measured.

• This is then taken forward when going into delivery, and reviewed to see if the project is successful (benefits management)

The size of the project will determine whether the E2E business case needs to be followed (for example, smaller projects can combine the OBC and FBC stages of a business case under HMT Green Book).

• Large projects might need a project feasibility study before commencing the business case process

What sort of benefits can you expect from a business case?

1. Higher profit
2. Reduced costs
3. Higher quality service offering (this is an end in and of itself in the public sector)
4. Greater market share
5. Better brand
6. Etc...

• How can procurement add value? Cutting costs without affecting service delivery, or by acquiring higher quality services

The Economic Case in the 5-Case Model will do cost-benefit analysis. Some costs and benefits are easy to quantify, whereas others are less so. Public goods, for example, are difficult (e.g. benefits to air quality etc).

• For a capital asset, benefits and costs would be through-life as well, which can be difficult to estimate

A business case might have a stated aim, and will consider the different approaches to get there.

• These will be different options, weighed up in an options analysis exercise
• From a procurement perspective, options might vary depending on the various routes to market, the contract award method etc

A business case needs to meet the strategic objectives.

• Each option in the options analysis will be weighed against SMART objectives
• If an option does not meet a SMART objective, it is rejected

What is sustainable procurement?

• Remember 'People, planet, profit'
• Translates to social, environmental and economic sustainability
• This isn't just a 'nice thing to do': it benefits businesses reputationally, helps them attract ethical consumers and be compliant with regulations

It's intuitive where procurement would be involved in the business case process (chiefly the Commercial Case in the 5-Case Model, but will feed into other parts too).

• But it's important to have a RACI Model to manage the development of the business case
• 'Responsible, Accountable, Consulted and Informed'
  • These are mutually exclusive generally, apart from 'responsible' and 'accountable' which could apply to the same person
• Assigns responsibilities for various tasks
• This is important for business cases because multiple stakeholders will feed in

Estimating costs and prices

Price is the supplier's charge for something. Cost is how much a buyer will spend on something.

• Costs for something may include more than just the direct fee paid to the supplier: there might be support costs, or logistics costs for example

Primary data is data collected directly by yourself, likely through field research. Secondary data comes second-hand, likely through desktop research.

• Primary data sources in procurement might be through RFIs, searching past contracts, asking suppliers
• Secondary data sources might come from market research firms, or large index datasets

Procurement staff could try and ask for open book costing, where the supplier is transparent about their costs and profit. Cost transparency is where both sides share their costs. These are quite rare.

Main types of cost: Materials, labour and overheads / other expenses

• Other expenses can cover a lot of categories (likely a lot of indirect costs)
• Capital procurements are considered fixed assets, not included in these categories
• Costs can alternatively be split by function as well
• Another popular way is direct costs versus indirect costs
  • Best way of understanding direct costs: if you didn't produce a good, the activities that you'd completely be able to remove as a result, are direct costs
• Another way is fixed versus variable costs (intuitive)
  • These don't always map cleanly to indirect and direct costs, so don't confuse them as interchangeable

Suppliers price in two main ways:

1. Cost-based pricing: a markup on their costs
2. Market / demand-based pricing: price is determined more based on an analysis on the market

When estimating costs for a business case...

1. Consider all of the direct costs first
2. You'll inevitably need to consider some indirect costs, but these might be harder to calculate.
   1. For example, for support functions like HR and finance, how much cost should you take for the upkeep of these functions?
   2. You might make a general assumption for a % of the direct cost to be added on top as indirects

Both sides might set target prices / target costs for a transaction, which can be negotiated.

Total Cost of Ownership (TCO)

This is particularly important for long-term procurements, such as capital assets. It includes the cost of upfront procurement, support and through to disposal.

The price / cost iceberg is a useful concept: it says that the upfront price is only the tip of the iceberg, under which there are many through-life costs.

Whole-life asset management / through-life costing (many variations of this phrase basically): this is the process of evaluating all of the through-life costs associated with an asset.

• When we do through-life costing, both through-life benefits and costs need to account for this depreciation of currency
• So how do we measure the through-life costs of a project today?
• This type of conversion into today's money is called discounted cashflow (DCF)

Developing a business case

This section looks at various criteria that can be applied in business cases.

Costs

• There could be a lower cost with procuring from a new supplier (either upfront or whole-life cost)
• A make or buy analysis might show the need to outsource provision
• However, lower costs might mean lower quality, so this will need to be considered
• The business case also needs to consider how reliable cost data is

Benefits

• Benefits can be financial and non-financial (the latter is more common in the public sector)
• A business case will consider the cost-benefit analysis of each option
• In this, risk factors may be applied where outcomes could be wide-ranging

Time

• Time is also an assessment factor: does the item need to be procured for immediate use?
• What are the procurement timelines for each option? Are some options prone to delay?

Ultimately, a business case has to demonstrate that it meets organisational needs. Specifications translate organisational needs into what the product has to do.

Benchmarking

Benchmarking could help demonstrate why a particular option is preferred.

• It compares your organisation against industry best practice
• Each option in a business case may need to meet a certain industry benchmark of performance
• There are different types of benchmarking:
  • Internal: comparing within the organisation
  • Competitor: comparing against top competitors
  • Functional: comparing functions, such as the finance function, across different organisations (that aren't competitors)
  • Generic: comparing more generally outside of the types above

Financial budgets and purchasing

Financial modelling is where you build a quantitative model based on a potential financial situation. In this, you might:

• Create 'what-if' scenarios
• Generate a cost model, with assumptions around future prices

Annual budgets are generally broken down into 'control periods'. Budgetary control is how the budget is used to control the finances of an organisation.

• Budgetary control will include things like in-year forecasting, frequent reporting and identifying the variances
• There will be a budgetary control report at the end of each control period, showing variances where they apply
• Budgets for different departments feed into one another
  • For example, revenue budget → production budget → direct procurement budget etc
• Things might be paid for, and recorded in the accounting system, at different times. Measuring the former is important, so that the organisation has an understanding of its cash position. This is called a 'cash budget'

Functional budgets are the budgets of running each function in an organisation. There are different ways of doing this:

• Incremental budgets: start with last year's actual costs, and adjust
• Zero-based budgets: start from scratch (e.g. the bottom of this article talks about the Starmer Government's zero-based budgeting)

Fixed and flexible budgets: the formal budget at the start of a Financial Year (FY) is the fixed budget.

• This will be based on certain assumptions around the number of sales, for example
• This isn't set in stone, as things change
• The flexible budget translates the fixed budget to account for what has actually happened in the period (i.e. based on the number of sales we've had, what should the budget be?)

Chapter 2Industries, markets, costs and prices

Industries

The Standard Industrial Classification (SIC) system is a famous way of grouping companies into sectors e.g. mining, construction, services etc.

• These sectors then break down into segments underneath

Manufacturing

Manufacturing companies convert materials and components into finished goods. These goods could be:

• Finished consumer goods
• Intermediate goods e.g. components
• Capital equipment

The types of goods they produce could be meeting different types of standards:

• The specification could be given by the buyer, if it is highly complex e.g. defence technologies
• There could be a recognised industry standard specification
• Some items are standard in and of themselves e.g. chemicals

Manufacturing companies can have quite complex supply chains, involving various materials and components.

• Some sectors have adopted world-class practices, such as the just-in-time (JIT) methodology of procuring and producing, and Materials Requirements Planning (MRP)
• Logistics is an important consideration in manufacturing supply chains, particularly as companies would have global suppliers
• Advanced technologies, such as RPA and AI, have been integrated into manufacturing and supply chain processes
• ESG and Net Zero are important considerations in manufacturing supply chains

Key implications for procurement teams:

• Production needs ongoing resources feeding into it: resource inputs need to be available at the right time to avoid machinery down time
• Warehousing can be a big driver of costs in manufacturing supply chains; JIT aims to avoid this by minimising storage
• Quality is important, as defects are costly. Total Quality Management (TQM) is a methodology for rigorously adhering to standards
• There are some unique categories to manufacturing: MROs and capital equipment are needed to enable manufacturing

Fast-moving consumer goods (FMCG) is a sector falling underneath manufacturing.

• There are short product lifecycles (think of 'fast fashion'), so procurement needs to be agile
• Defects can be costly, so quality will need to be rigorously adhered to
• FMCG works on volume rather than margin, so keeping costs down is important

Construction

There are different types of construction: it could be for housing, manufacturing or large-scale infrastructure, for example.

The level of construction work required can also vary: it could be simply a refurbishment of existing works, or a new project entirely.

The construction supply chain

• The various aspects of construction are highly specialised (e.g. engineering, equipment, trades and project management). This means there will be a lot of subcontractors
• It's usual for construction projects to be competed, because there will generally be a plurality of big construction firms interested
  • Contracts will go to the large Tier 1 supplier, who will then subcontract the specialist parts down to their supply chains
  • Tier 3 suppliers will often be sole traders, doing trades work (e.g. plumbing). They will provide services to the Tier 2 suppliers
• Again, ESG and Net Zero is becoming important

Types of construction contracts

• Design and build contracts: supplier will take on both aspects of the construction
• Traditional contracts: the design is handed to the supplier to then build
• Construction management approach: the buyer directly procures from a range of suppliers and then gets a manager to oversee the project

What is the construction procurement process?

After the customer takes control of the building, they'll usually have a defect liability period where the contractor will have to address defects.

Key implications for procurement teams:

• Many heavy supplies e.g. bricks and steel, are low value so transportation costs can be disproportionate to the value of the materials
• JIT might be used to minimise storage costs and concerns around theft of supplies
• Having a complex supply chain: might make use of 'collateral warranties' to ensure subcontractors deliver
• The quantity surveyor will provide a 'bill of quantities' (BOQ) setting out the requirements, which will then go into tenders

Retail

Retail is quite a catch-all term: it can capture FMCG (discussed earlier) and also high-margin specialist retail e.g. art shops.

• Retail stores could prioritise either breadth (more product categories) or depth (fewer product categories, but more options within them)
• Online stores aren't restricted by physical space and a localised customer base, so could have both breadth and depth

The traditional retail supply chain is as follows:

Implications for procurement:

• The products that are bought need to match customers' interests; the procurement function needs to understand the end user
• There isn't much differentiation between what is bought from wholesalers and what's ultimately sold by retail
  • I.e. they buy from wholesalers and sell for a small margin onto consumers
  • Minimising cost is important
• The speed of online retail is disrupting the physical retail industry, with faster deliveries and greater choice; how can procurement teams facilitate this?
• The retail buyers will select and order products: they have a big role. They may focus on a particular category, or work across categories

Agriculture

Procurements could include machinery, feed for livestock, breeding animals and chemicals.

There isn't much product differentiation between agricultural produce and meat, except for some quality standards.

Prices can vary dramatically depending on seasons, weather events and tariffs placed on agricultural products.

Hygiene and ethical standards are important in agriculture:

• Disease can wipe out livestock
• The EU bans chlorinated chicken from the US due to hygiene concerns
• Ethical standards such as Fairtrade products, are geared towards ensuring that people in agricultural supply chains are treated fairly
• ESG is also becoming increasingly important e.g. with reference to packaging

Implications for procurement

• Uncertainty in the supply chain due to unpredictable events, and nature of a global supply chain
• Low market power sellers, so the big customers are able to dominate
• Procurement needs to be cognisant of environmental and hygiene regulations

Financial services

Banks are heavily regulated. However, procurement is relatively less important due to lower complexity spend. Most spend is indirect spend:

• Facilities management
• Any use of outsourced corporate services or advisory
• IT infrastructure

Implication for procurement: low complexity activities, but may be emphasis on keeping costs low due to tight profit margins.

Service industries

Differentiate between equipment-based and people-based:

• Equipment-based: services delivered using equipment e.g. transport (will require more upfront investment)
• People-based: services delivered mainly through people e.g. tourism

Firms might choose to outsource services that aren't core to its offering e.g. HR, accounting.

2.2: Competitive forces in markets

Porter's 5 forces model

Competitive rivalry

• In the case of commodities and primary products, product differentiation is limited, so competition is intense
• More commonly, there might be competition where each provider offers similar, but not the same, service
• High competition will lead to lower profitability and prices
• What sort of things affect competition?
  • Market concentration
  • Product differentiation
  • Switching costs
  • If fixed costs are high, it induces firms to compete for achieving a high enough volume of sales to cover their costs. This will make profit margins low

Threat of new entrants

Keeps profits low, as a higher profit margin can tempt new entrants into the market. This depends on if there are barriers to entry into the market (i.e. is it challenging to be able to set up, scale and sell that product?).

Bargaining power of suppliers

Can be affected by a number of things, such as the supply market concentration, switching costs, how important the product is to customers.

Bargaining power of buyers

If buyers have strong bargaining power, prices will be lower. This can be affected by a number of things such as buyer market concentration, switching costs and importance of the product.

Threat of substitutes

Something that is different from the seller's product, but can derive a similar benefit for the buyer (the extent of the similarity is crucial, as this affects the threat level). A higher availability of substitutes will make the market more competitive, decreasing prices.

2.3: Costs and prices

• It might be split across different departments, potentially showing where departments are buying the same things
• It might segment spending by direct materials, and various indirect costs

Procurement professionals can also try to estimate suppliers' costs.

• You might use raw material estimates and prices to feed into the model
• You might use RFIs from suppliers to gather information
• You'll need to estimate labour costs as well, using various open-source data and technical estimates
• Finally, you need to measure supplier's indirect costs and profit margin: this could be a % markup that you estimate is on top of the other costs

Should costing: estimating what a supplier's costs should be for selling a product. It's built in a bottom-up way, following the approach above.

'Negotiating the gap': trying to reduce the gap between the seller's price, and what the buyer thinks the seller's price should be. The should-cost assumptions and model might be explored in this, and used to drive the price down.

Another way of estimating costs and prices is market data.

• This could be through market research firms, industry benchmarks and government departments
• A market research firm could be asked to do a purchase price cost analysis (PPCA): i.e. analysing and estimating direct and indirect costs of a supplier

Whole-life costing is important for capital items e.g. maintenance costs and training for operating the equipment.

Open book accounting could be used as a transparent way of negotiating on price. The supplier openly reports on their costs and profits for a contract; this is relatively common in large government defence contracts.

The head of procurement will make the budget for:

1. Direct materials that need to be purchased
2. The direct costs of the procurement function

Chapter 3Specifications

3.1: Specifications

Conformance specifications

The risk of the specification being inadequate is the buyer's risk; the supplier simply delivers according to the specification given to them.

Technical specifications

• A description of the technical requirements, outlining the terms of acceptance alongside (could allow for tolerance limits against the design)
• 'Tolerance': allows for some variation within a certain bound around the technical spec
• Will include the specification scope, material requirements and drawings, for example
• Closed vs open specifications: closed specifies a certain product with no alternatives, whereas open specs don't name a specific product
  • A brand could be specified, that a supplier then has to use in its product

The buyer can be sure what they're going to get: it's a transparent way of delivering and measuring the product.

However:

• The buyer needs to have proper technical knowledge to be able to draft a detailed spec
• This can take a lot of time to develop, and involve design costs

For the above reasons, conformance specifications aren't as common anymore: markets are more dynamic and there is a need for continuous innovation.

Specifications by chemical/physical properties

Specify the chemical or physical properties e.g. a particular formula of the product required.

Specifications by sample

A buyer may have a prototype or sample that they want a supplier to reproduce. This can then be sent to the supplier. Alternatively, the supplier can provide samples and then the buyer can select.

Performance specifications

This type of spec will include the functionality or outcomes that need to be achieved, rather than outlining specific designs.

This might be conveniently used when:

• Suppliers have more technical information
• There is less time and money to draft a conformance spec
• If you want to leave flexibility to account for evolving technology.

Functional specification: outlines the functions that a product needs to provide e.g. an app needs to have certain functionality (like certain icons/options).

Output specification: basically asks for a product that satisfies the purpose of buying it, rather than specifying designs.

Outcome specification: more high-level and conceptual, stating the buyer's ultimate end goal using the purchase.

Technical standards

These can be incorporated into both performance and conformance specifications. They specify a minimum level of performance required.

• One example is ISO 9000, which is a quality standard used across industries
• 'Market grade': refers to certain materials which have a grading system based on quality

Statement of work-based specifications (SoW)

Used in contract and project-based work. Outlines the requirements for all work that needs to be done.

• These can be conformance or performance specification based
• They'll outline the purpose of the work, scope, deliverables and milestones

Service specifications

Service specs use a Service Level Agreement (SLA). Services can be harder to measure because they are intangible.

Techniques to get information for specifications

• RFIs: suppliers can provide their view on what should be provided
• Early supplier involvement (ESI): a pre-qualified supplier could advise from an early stage in the sourcing process

3.2: Sections in specifications

It's common for IT products, where a supplier will create software and provide updates/maintenance through-life.

• It gives the buyer security that the product will be taken care of for its life, and that they don't need to search for a new product.

Integrated logistics support (ILS): provides equipment, spares, personnel and information required to meet the buyer's needs.

• A single supplier provides all services needed to support an item through-life

Scope: will identify all materials and items needed initially + all services needed for support and disposal.

User requirement document (URD): sets out what the user wants from a product, and a specification can be produced from this.

• With consultation, these requirements are refined
• Requirements need to be cognisant of the cost envelope, which can lead to decisions to exclude some services from acquisition or support if they're too expensive

The detailed requirements for a through-life contract would mostly be output or outcome-focused as opposed to conformance.

• This is because they are long-term contracts where technology will change
• The detailed requirements will be the longest part of a contract and will have sub-sections covering the various services required

Testing and acceptance

Testing by the supplier is known as 'alpha testing'. This will happen before it's passed to the buyer.

Testing by the buyer is called 'beta testing', or user acceptance testing (UAT).

• These are done on the buyer's premises and in simulated environments

Change control

This is how requests to change requirements are carried out.

• A change control procedure governs how these requests are done, negotiated and then implemented
• In a through-life contract, these may be inevitable due to changes in circumstances and demand

ESG

Remember the 'Triple Bottom Line': People, Profit, Planet. This is becoming increasingly important in contracts, in order to hold suppliers to account for achieving ESG.

• Environmental criteria are important for provision of goods/machinery, less so for services where the carbon footprint is less
• ISO 14001 is a standard for environmental management
• Social criteria apply to promoting wellbeing of society and employees e.g. adhering to workers' rights
• Governance criteria refer to things like business ethics, legality

3.3: Inadequate specifications

Specifications could be inadequate if they're under-specified, over-specified or vague.

Under-specified could refer to:

• Insufficient scope e.g. on quantity, or doesn't cover enough through-life support
• Bought the wrong thing: specifications might point to the wrong type of product, or quality
• Missing out items from the specification

Over-specified could refer to:

• Too strict a tolerance limit, which is unnecessary and adds cost
• Extra and redundant features
• Excess quantity

Vague specifications: could lead to contract disputes, or the buyer having to pay to address issues.

How do you write better specifications?

• Employ or train people with skill in writing specifications
• Use best-practice templates for specifications
• Use pre-existing specifications
• Make sure to involve the relevant stakeholders throughout the drafting process
• Value analysis (estimate the costs and benefits of each additional requirement you add)
• Standardisation: use standard products rather than bespoke ones where possible

3.4: Regulating specifications

Standardisation

Ensure there's a set and uniform standard for an item across the organisation, but this can apply more widely at national and international level.

• Use standard specifications: ensure that there's minimum variability in stock bought where possible.
  • 'Stock proliferation' refers to a situation where there are rising numbers of particular types of stock that are 'slightly' different from each other
  • Stock proliferation unnecessarily inflates inventories and can be difficult to track and move
  • Standard specifications can minimise this proliferation
• Variety reduction: reducing the different types of components and materials used where possible
  • Proactive approach: encourage designers to think about standardising when they design a product
  • Reactive approach: management/procurement standing up a team to investigate variety reduction across teams

This can ensure that there is a smaller range and quantity of stock held, smaller number of suppliers to manage and simplifies procurement process using a standardised process.

Value

where function can be understood to mean the benefit provided by the use of an item.

Value analysis (VA)

A method of studying the value of existing products. It analyses each function provided by a product and attempts to find ways to provide these functions at the lowest cost possible.

• It will attempt to re-specify the product, in a way that provides the same function but at a lower cost
• A multi-functional team would be set up to do a VA exercise on a particular product
• Possible lines of analysis could look at the purpose of the product, its performance, reliability and maintenance requirements

The process would consist of an information-gathering stage, analysis, idea generation, evaluation, development and presentation:

Function analysis: used in VA to break down a product into sub-functions which are thereby analysed to evaluate whether they add value.

• One method is to use a noun and a verb for each function e.g. provide X

Cost analysis: used in VA to break down the direct cost for each sub-function of a product.

How do you measure value to the customer? This is quite subjective.

• Functions could be categorised in qualitative ways, as this is difficult to quantify
• Kano Model: describes five reactions by customers to a particular product feature

Value engineering

Similar to VA, sometimes described along with it as 'VA/VE'. VA applies to existing products, VE applies to new products that aren't in production yet. VE is used to:

• Produce value at lowest cost
• Increase value without increasing cost

It needs to consider the entire lifecycle of the future product, including whole-life costs. This will include a prediction for when the product would become obsolete, i.e. plan out the expected lifecycle (planned obsolescence).

• But noting that this shouldn't cause a degradation in the product's perceived value over the course of its life

The stages of VE are similar to VA, i.e. information gathering, analysis etc.

Target pricing: the process for how you arrive at a competitive price for a new product. This will then yield a target direct cost. The VE team will then try to ensure that the planned product produces value that is worth the target price.