CONTEXTS OF PROCUREMENT AND SUPPLY

CIPS DIPLOMA LEVEL

NOVEMBER EXAMINATIONS 2017

© Lean Procurement 2017

Chapter 12 – Procurement in the Private and Third Sectors
Assessment criteria
4.3 Analyse the impact of the private sector on procurement or supply chain roles

a) Objectives of private sector organisations; profitability, market share, etc

b) Regulations that impact on procurement and supply operations
c) The importance and role of branding

4.4 Analyse the impact of the not for profit or third sector on procurement/ SC roles

a) Objectives of the not for profit sector

b) Regulations impacting on charities
c) Need for regulated procurement exercises
Chapter 12 – Procurement in the Private and Third Sectors
1. Private sector organisations
As in Chapter 11, can be classified into the following:-
 Ownership and control
 Basis of size
 What the business activity the organisation carries out

Constitutions
Can be formed in various ways:-
 Sole trader – Individual business
 Partnership – Group of individuals held together by a legal agreement
 Company – Can be a very large number of people by legal ‘incorporation’as a company

Sole tradership
 No legal distinction between person and business entity
 Individual puts in all the capital and is liable for all the debts
Chapter 12 – Procurement in the Private and Third Sectors
1. Private sector organisations
ADVANTAGES OF SOLE TRADER
Few costs or legal requirements to
establish the business
No public accountability (though
financial records are required for tax
purposes)
The proprietor controls all decisions
for the business – and enjoys all the
profits
DISADVANTAGES OF SOLE TRADER
The proprietor is personally liable for
the business’s debts
It may be difficult to get finance for
the business (eg a loan by personal
guarantee)
Resources are limited to what the
proprietor can personally generate
Chapter 12 – Procurement in the Private and Third Sectors
1. Private sector organisations
Partnership
 Potential to contribute more capital and expertise to the business
 Has to be at least two to a maximum 20 partners for a commercial partnership
 Does not have separate legal identity from its members, means:-
 Partners jointly own the assets of the partnership and liable for its debts
 Partners are entitled to manage and act as agents
 Change of partners terminates the old firm and begins a new one
Chapter 12 – Procurement in the Private and Third Sectors
1. Private sector organisations
Partnership
ADVANTAGES DISADVANTAGES
Partners contribute capital and Decision-making has to be
expertise shared/negotiated
Partners share managerial and Profits have to be shared among the
financial responsibilities and liability partners
With greater asset backing, it is often Partners are generally personally
easier to raise loans than for a sole liable ‘without limit’ for the
trader partnership’s debts
Suits professions, as members are
prohibited from practising as limited
companies
Chapter 12 – Procurement in the Private and Third Sectors
1. Private sector organisations
Limited company
A separate legal entity from individual owners:-
 Company can own assets and enter into contracts/ liabilities in own name
 Company payment of debt will come from the assets owned by the company
 Company owners are shareholders who pay for shares in the company

ADVANTAGES DISADVANTAGES
Limited liability protects owners from Expense and red tape of
personal liability for contracts and incorporation, and the constraint of a
debts written constitution
Shares are a stable source of finance: Subject to regulation eg re public
the amount of capital is unaffected by disclosure (in financial reports and
trading, and is not subject (like loans) accounts etc)
to finance costs
Directors provide the expertise the Share trading can result in unwanted
business needs, without ‘diluting’ change of ownership
ownership
Chapter 12 – Procurement in the Private and Third Sectors
1. Private sector organisations
Limited company
A separate legal entity from individual owners:-
 Company can own assets and enter into contracts/ liabilities in own name
 Company payment of debt will come from the assets owned by the company
 Company owners are shareholders who pay for shares in the company

Differences between a public limited company (PLC) and private limited company (Ltd):-
 Plc can offer shares to the general public, Ltd cannot
 Plc must have minimum authorised share capital of £50,000 along with at least
 two members and two directors
 Plc is subject to detailed company law requirements regarding shares, directors,
 AGM’s, accounting etc. – much less bureaucratic for Ltd
Chapter 12 – Procurement in the Private and Third Sectors
1. Private sector organisations
Small and medium enterprises
 Micro enterprise – Less than 10 employees, less than 2 Million Euro turnover
 Small enterprise – 10-49 employees, less than 10 million Euro turnover
 Medium sized enterprise – 50-249 employees, less than 50 million Euro turnover
 Large scale enterprise – more than 250 employees, turnover more than 50 Mill Euro
 Around 99% of enterprises are in this area and provide around 65 million jobs
 All require financial guidance to assist them where they lack financial strength

 Becoming more important due to:-

 Shift from manufacturing to service industry
 Increased consumer demand for more specialised and customised products
 Growth of outsourcing
 Job and cost cutting creating downsized organisations
 Government policy to promote SME’s
 More accessible technology
Chapter 12 – Procurement in the Private and Third Sectors
1. Private sector organisations
Small and medium enterprises
 SME’s can have the advantage by getting into the cracks of markets bigger players
 won’t bother with
 Where they struggle is raising loan and share capital, managing cash-flow etc
 Large organisations benefit from economies of scale:-
 Technical economies – Production processes, larger machinery etc
 Commercial economies – Bulk discounts
 Financial economies – Obtaining loan finance at better interest rates

 UK government support has focused on this problem, initiatives created to:-

 Encourage on-time payment of bills by companies
 Relax rules and regulations applicable to SME’s
 Reduce the fax burden on small business
 Provision of grants, information, advise and support
Chapter 12 – Procurement in the Private and Third Sectors
1. Private sector organisations
Small and medium enterprises
 Being a buyer in a SME will face the following challenges:-
 Having to work within a limited expenditure budget and tight cost controls
 Management of cashflow
 Create a supply chain that is responsive to innovation, small quantities, and
fast turnaround

 Buyer purchasing from a SME will need to take into account:-

 Limited capacities
 Potential financial instability
 Cashflow issues

Sources of finance in the public sector

 Initial capital investment by the owners
 Share capital
 Retained profits
 Loan finance
 Government grants
Chapter 12 – Procurement in the Private and Third Sectors
2 Objectives of private sector organisations (4.3a)
Profitability
 Why the need to make a profit?
 Profit ensures that all costs are covered, important for long term
 Profit belongs to the owners or shareholders of the business
 Profits not paid to the shareholders are available for reinvestment of the business

 Procurement staff could be given objectives to achieve the lowest possible cost
 Often this isn’t good for the short and long term
 Better for buyers to take a more broader look at value across the organisation
 Any profits made by procurement go straight onto the bottom line

Market share
 Increase market share by winning more better quality customers of higher value
 Do this by competitive advantage by doing things better than anyone else
 Competitive advantage achieved by matching company strengths to markets needs
 Can be measured by increase in revenue, customers etc
 Very much a key indicator of performance
Chapter 12 – Procurement in the Private and Third Sectors
2 Objectives of private sector organisations (4.3a)
Stakeholder value
 Profitability to create a return on the value of shareholder investment by:-
• Dividends
• Growth in the capital or equity value of shareholders investment:-
• Retained profits
• Maintaining or bettering company shares or assets

Corporate Social Responsibility (CSR)

 Largely driven by the public, media and consumer pressure
 Potentially high risk of reputational damage
 ‘Social responsibility of business is profit maximisation;
 ‘Spending on objectives not directly related to profit is irresponsible to shareholders’
 ‘Public interest as state received taxes on profits’
Chapter 12 – Procurement in the Private and Third Sectors
2 Objectives of private sector organisations (4.3a)
Corporate Social Responsibility (CSR)
How does CSR serve the interest of the firm?
 Law, regulation and Codes of Practice impose CSR obligations on organisations
 Voluntary measures may increase the corporate image
 Above statutory provisions can be used to attract better
employees,suppliers and customers
 Increased CSR creates a market demand (or threat of boycott)
 Helps create a climate that the company can succeed in the long term
Chapter 12 – Procurement in the Private and Third Sectors
3. The regulation of private sector procurement (4.3b)
The influence of government
Four main areas:-
 Governments influence the operation of organisations; what they can or can’t make
 Governments influence the costs and revenues incurred by organisations
 Governments influence organisations by the actions they take in long term decisions
 Governments influence the values and norms that are regarded as acceptable within
the national culture (e.g. banks)

 All governments state that some regulations of the private sector is required
 QQ – What would happen if there was absolutely no regulation?
 Why?
 Governments want to keep a balance between consumers and firms
 Governments with to promote competition
 Governments want to assist firms to prosper
 Governments want to protect national interests
Chapter 12 – Procurement in the Private and Third Sectors
3. The regulation of private sector procurement (4.3b)
Law and regulation
Can be broken down into three sources:-
 Regulations and directives from the EU
 Statute Laws
 Case Law

Also voluntary codes of practice

Important for procurement because:-

 The organisation does not have a choice in the matter and compliance is a must
 Requirements are constantly changing
Chapter 12 – Procurement in the Private and Third Sectors
3. The regulation of private sector procurement (4.3b)
Law and regulation
 In the past there have been attempts to increase competition by deregulation
 However, they still exist to a very large scale and can effect decisions by:-
 Restricting practices that tend to stifle competition
 Protecting the rights of minority groups
 Protecting the rights of employees in the workplace
 Protecting the rights and safety of consumers
 Enforcing environmental protection standards and commitments
 Restricting the type of products that firms can supplier
Chapter 12 – Procurement in the Private and Third Sectors
3. The regulation of private sector procurement (4.3b)
Regulation of privatised firms
 Firms that used to be under government ownership now in private hands
 Need to protect consumer against price increases, hence regulation
 Publicity an important factor as so many people are effected
 Other powers include:-
 Issuing and renewing licenses for firms wanted to operate within the market
 Setting standards of good practice
 Monitoring the activities of firms operating in the market
 Communication and promotion of market activities
 Making reports to the government
Chapter 12 – Procurement in the Private and Third Sectors
4. Key features of private sector procurement
The importance and role of branding (4.3c)
 Branding develops perceptions of quality and value
 Brand positioning – how the brand wants to be perceived by customers
 Procurement should attempt to support the brand
 For example:-
 Procurement decisions supporting quality values
 If brand is seen as low price then procurements should also be aligned
 If brand is high in CSR the procurements should also be aligned

Alignment with suppliers

 Relationships along the chain have been promoted and working together
 Traditional adversarial relationships are becoming less (although still needed)
 SCM look at activities such as:-
 Supplier development
 Collaborative waste and cost reductions
 Collaborative process and quality improvements
 Collaborative efforts to improve labour and environmental standards
 Creating synergies
Chapter 12 – Procurement in the Private and Third Sectors
4. Key features of private sector procurement
Innovative supply chain approaches
Includes:-
 Early involvement of procurement
 Early involvement of suppliers
 The use of electronic procurement
 Pro-active contract management
 Flexibility in the use of competition
Chapter 12 – Procurement in the Private and Third Sectors
5. Third sector organisations
The not for profit (NFP) sector
 Organisations not controlled by the government and not for profit
 Created for an objective other than for profit
 Funding comes from voluntary donations, legacies, sponsorships and grants
 Can be owned by their members or by a trust

The voluntary and subscription sectors

Sector can be divided further into:-
 Voluntary sector – Churches, charities, interest groups
 Subscription paid sector – Clubs, trade unions and professional bodies

Objectives of third sector organisations (4.4a)

Can consist of:-
 Raising public awareness of a cause or issues
 Political lobbying of a cause
 Raising funds
 Provide material aid and services
Chapter 12 – Procurement in the Private and Third Sectors
5. Third sector organisations
Objectives of third sector organisations
Key characteristics of the third sector
Objectives and expectations • May be multiple service objectives and expectations
• Expectations of funding bodies are usually very influential
• May be subject to political lobbying
• Multiple influences on policy: complicates strategic planning
• Consultation and consensus-seeking becomes a major activity
• Decision-making can be slow
Market and users • Beneficiaries of services are not necessarily contributors of revenue or
resources
• Multiple stakeholders and customers
• Service satisfaction is not measured readily in financial terms
Resources • Multiple sources of funding
• High proportion from sponsors and donors
• Resources received in advance of service delivery, often with attached
expectations
• Tends towards strategic emphasis on financial or resources efficiency
rather than service effectiveness
• Strategies and communications may be addressed as much towards
sponsors and donors as clients
Chapter 12 – Procurement in the Private and Third Sectors
6. Key features of third sector procurement
The need for regulated procurement exercises (4.4c)
 Can be seen that procurement provides a stewardship function
 Funds can be received from parties that don’t receive a benefit from the donator
 Can also be seen that focus is on waste rather than satisfying the customers needs

Regulations impacting on charities (4.4b)

 Subject to the same laws and regulations as private and public sectors
 The Charities Commission is the body for charities in England and Wales, set up to:-
 Register charities
 Ensure charities meet the legal requirements
 Check that charities are run for the public benefit
 Ensure that charities are independent
 Detect and serious mismanagement

Their actions include:-

 Gathering and maintaining information about charities
 Offering advise and guidance
 Auditing
 Investigating complaints
Chapter 12 – Procurement in the Private and Third Sectors
6. Key features of third sector procurement
What do third sector organisations buy?
Includes:-
 Services (can be same as public and private)
 Retail materials (can be same as public and private)
 Similar operating requirements
 Specific requirements relating to activities

Key drivers for third sector procurement policy

Includes:-
 The values of internal and external stakeholders
 The need to align procurement policies and procedures with core values
 Management of reputation and reputational risk
 Need to source inputs for a wide range of activities
 Need to act as retail or merchandise buyers
 More on Page 238
Chapter 12 – Procurement in the Private and Third Sectors
Homework
Describe FIVE possible ‘drivers’ or influencing factors of procurement activities in third sector
organisations (25)

Additional Reading
Misplaced supplier loyalty in the third sector
https://www.cips.org/supply-management/opinion/2013/april/charity-challenge/

Procurement at Marie Curie

https://www.mariecurie.org.uk/who/plans-reports-policies/ethical-statements/purchasing#RA5YMFG7Tu1dQtTx.97

Part time procurement roles in the Third Sector

http://scouts.org.uk/media/255487/International_Event_Manager___March_13.pdf
Chapter 12 – Procurement in the Private and Third Sectors
Oil Co Exercise Number 12
The CEO wants verification that the company is compliant in all aspects of the business.

Given the nature of the company’s operations and global scope this is a large exercise. To begin
with he has requested the areas that are most at risk for non-compliance and an indication of
the laws and regulations that the company will need to be compliant to.

What areas would you think would be highlighted in the response to the CEO?