CIPS L3M2 using techniques to obtain supplies to purchaser’s requirements

This CIPS L3M2 assessment criteria 1.1 requires you to be in a position to;

1. Define sources of added value
2. Define value for money
3. Apply the five rights to procurements of both products and services
4. Discuss the concept of life time costs

The idea here is to understand ways in which procurement obtains what is required by the purchaser.

And that means paying attention to things like value for money, 5 rights of procurement and the concept of life time costs

DEFINING SOURCES OF VALUE-ADDED VALUE

The point here is for you to not only be in a position to define value, but also show how procurement can help with value addition or added value.

Value is the extent to which a product or service supplied to a customer meets their requirements.

And what one person finds valuable may not be what another person finds valuable, but at the end of the day…

Value can be assessed by how much the customer is willing to pay

Value is about meeting the exact needs of the individual or organisation at the time at which they are required

What about ADDED VALUE?

Added value is commonly understood as the amount of money an organisation adds on after costs and which contributes to their profit

First of all, there are a lot of other areas that can add value to an organisation product or service, for example;

• Monetary – this means understanding and controlling costs that contribute towards total costs, in this case fixed cost, variable costs, direct costs and indirect costs
• Reduced input costs – The idea here is to work with the suppliers to lower costs of the products or services you are buying, this way even if the selling price remains the same you make more profit
• Brand – a strong brand can add value by building awareness, attracting customers to engage with the products or services, communicate with the target audience
• Additional features- for example a car sold with free insurance for a year
• Excellent service
• Reputation
• Convenience

DEFINING VALUE FOR MONEY

Value is not just about the price you pay for a product or service.

When making a purchase, value for money is also achieved through cost-effectiveness and efficiency

The idea is to not just aim for the lowest price but to also look at total cost approach

Total cost approach is an approach that considers all the costs associated with procuring an item

And this could mean looking at the following areas;

• Product or service price
• Currency and exchange rates (in international set ups)
• Freight costs – is the cost of transport included in the quotation? How much is the transport going to cost? Does the price of transport make the total cost uncompetitive?
• Maintenance costs
• Warranty
• Environmental factors
• Supplier reputation
• Order quantities and inventory
• Payment terms etc

THE FIVE RIGHTS OF PROCUREMENT OF PRODUCTS AND SERVICES

The five rights of procurement is a list that states the five key objectives to refer to when buying products of services.

You have to procure goods or services;

1. In the right quantity
2. Of the right quality
3. At the right time
4. Delivered to the right place
5. At the right price

Practical application!

Think of any product you constantly use. Referring to the Five Rights of procurement, write out a purchase order which answers the five rights and explain to the supplier exactly what is needed, where, when and for how much.

THE CONCEPT OF LIFETIME COSTING

Lifetime costing is the total anticipated costs of designing, procuring, acquiring, running and disposing of a fixed asset during its lifetime

The point here is for you to know that when you buy something you have to factor in more costs and not just the price you are paying the supplier

Meaning what? Meaning you have to add up all the costs like

Pre-purchase costs + item purchase costs + operating costs +maintenance costs + insurance costs + disposal cost = total lifetime costs

Let’s look at a simple example to explain this

Let’s say a company is in need of new office printers.

The company sends out a request for quotation (RFQ) and the get two quotes back

• Option A – $300
• Option B – $500

The quick thing to do is choose one or the other, but what about the total life cost of these printers?

This can be broken down in the following manner

Initial Purchase Price:

• Option A (Cheap Printer): $300 per unit
• Option B (Premium Printer): $600 per unit

Operating Costs (things like Ink/Toner & Maintenance Over 5 Years):

• Option A: $100 per month × 12 months × 5 years = $6,000
• Option B: $50 per month × 12 months × 5 years = $3,000

Energy Consumption Over 5 Years:

• Option A: $15 per month × 60 months = $900
• Option B: $8 per month × 60 months = $480

Breakdown & Repair Costs Over 5 Years:

• Option A: $500
• Option B: $200

Resale/Disposal Value at End of Life:

• Option A: $0 (no resale value)
• Option B: $100

Let’s put all that together and make a decision

TOTAL LIFETIME COST (over 5 years)

Cost component	Option A	Option B
Initial cost	300	600
Operating costs	6000	3000
Energy consumption	900	480
Repairs & Maintenance	500	200
Resale / Disposal Value	0	-100
Total cost over 5 years	7,700	4,180

 

In this case you are better of with option B even though it looks expensive at the beginning

Advantages of lifetime costing

1. It improves awareness of costs
2. Makes it easy to make decisions
3. Decisions are backed by facts
4. Makes it easy to understand future financial implications and forecast

Disadvantages of lifetime costing

1. Can put unwanted pressure on management
2. Its time consuming
3. Costs can change and so the projected figures can be incorrect

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