L4M2 – DEFINING BUSINESS NEED

Chapter 1 – How to devise a business case for requirements to be sourced from external
suppliers
1.1 How business needs influence procurement decisions
A business case is a document that sets out the justification for undertaking a project on commercial
grounds. It captures the benefit of proposed action, any risk involved, how they can be mitigated,
timelines for completing the project with roles and responsibilities. It has to be aligned with
corporate goals. An example of business case is the procurement sourcing strategy (category
management plan)

Steps in preparing a business case

1. Identifying the opportunity or problem – Problem can be in closed form whereby something
that should not happen ends up happening or open ended whereby something is stopping the
achievement of an objective or blocking progress. A way of problem ID is the use of “5 Whys”.
2. Solving the problem
 Step 1 is to ask, “What is going on?” for closed problems, the Kepner-Tregoe approach
used during Apollo 13 launch can be used. It involves asking series of questions such as:
What is the problem? What is not the problem?
o Where is the problem? Where isn’t the problem? Etc.
For open-ended problem, a simple approach is to start by writing a problem statement
which contains key features of the problem in such a way that it helps point towards a
solution.
 Step 2 is to ask, “What do we know?” which involves data-gathering through several ways
including interviews, questionnaires, observations, documents & records.
 Step 3 is to ask, “What are the underlying issues?” which involves analysing the data
collected in step 2 and drawing conclusions that help develop a problem definition.
 Step 4 is to ask, ‘what could we do?” which involves generating possible options to address
the issue. One simple way is the use of “SCAMPER” checklist which involves a list of
questions that makes up the acronym “SCAMPER” – Substitute? Combine? Adapt? Modify?
Put to other uses? Eliminate? Reverse?
 Step 5 is to ask, “What is the best thing to do?” which involves selecting the best solution.
This is done after eliminating solution options which do not meet expectation, assessing
potential risks of the best solution and making a final decision.
 Step 6 is to ask, “How do we go about it?” which involves planning implementation of the
selected solution. Roles and responsibilities need to be defined using the RACI (Responsible,
Accountable, Consulted & Informed) matrix.
 Step 7 is to ask, Have we achieved our objectives?” – this involves testing if the target has
been achieved after implementing the plan. Ideally, results are shared to stakeholders.
 Step 8 is to ask, “Can we improve on what we have?” – This step recognizes that things do
not remain static for long therefore solutions needs to be improved in the future to enable
organisations optimize outcomes.
3. Preparing the business case – Done after the problem have been defined and a preferred
solution selected from a number of options. A typical business case for a new procurement or
modified re-buy will have the following sections.
 Executive summary – A clear, persuasive and comprehensive summary of the contents of
the business case.
  Long-term strategy considerations – An analysis of how this business case fits in with
broader purchasing and business objectives.
 Business requirements – A clear statement of the business need and evidence that cross-
functional collaboration has resulted in an agreement on the requirements.
 Price and cost analysis – Evidence to show that cost have been analysed and benchmarked
to show that the target price is reasonable.
 Market analysis – A clear & perceptive review of the current structure, issues and any likely
developments within the market for the item.
 Supply analysis – Current and potential supplier performance and capability.
 Technical developments – Analysis of key trends in technology and innovations that might
affect supply.
 Vulnerability analysis – Identification of areas that might make the organisation vulnerable
together with analysis of the risks and actions to minimise them.
 Sourcing objectives – Done for both cost and value and detailed enough.
 Implementation plan – Roles and responsibilities, tasks, milestones fully detailed.
 Competitive advantage – Summary of how the business case will create an advantage for
the organisation.

Types of purchases
 Straight re-buy – Purchase of item that has been purchased previously by the firm, of which that
is an existing specification. Usually purchased from an existing supplier on an approved vendor
list. The purchase is often relatively low value or low risk to the organisation if there is disruption
in supply.
 Modified re-buy – Same as straight re-buy but with some changes. It can be a cost reduction
target or volume discount request. This requires more effort from the buyer to achieve the
objective.
 New purchase – Requires the most procurement skill. Used for purchase of capital items, new
technology, finished products, etc. and involves deep understanding of the business
requirement, writing a specification, researching the supply market and key suppliers, writing
ITT, managing tender process, negotiation and supplier selection.

Defining Business needs/requirements – One way to identify business needs is to use a model with
the acronym RAQSCI (“rack-ski”), a model which takes six themes of needs and ranks them in a
specific order. The order is crucial as it focuses attention on potential trade-offs that has to be made.
1. Regulatory – Covers any legal requirements of regulatory bodies.
2. Availability – Covers continuing supply of goods and services when required and is based on
factors such as capacity, financial stability and risk.
3. Quality – Goods and Services consistency, repeatability and fitness for purpose.
4. Service requirements – The way service is provided. E.g., flexibility, support, etc.
5. Cost – Considered after other factors have been met. E.g., target cost, TCO, benchmark prices.
6. Innovation – Measures of improving customer experience using emerging technologies.
When defining business requirements, involving a range of stakeholders is very important.

In framing the business need, below are the elements that most appeal to management.
 Return on Investment
 Time to market – product market entry
 Customer satisfaction
 Improving productivity
 Managing risk
In summary, business case has to be credible and should tell a story to relate situations.

1.2. Cost and Price Estimation for Procurement Activities

Types of market data that can provide information on costs and prices
1. Desk research – also known as secondary research involves gathering already available
information from published sources including market reports, official statistics and trade
publications through a wide range of sources including the internet.
2. Field research – involves collection of more detailed, specific, original or raw data (primary data)
which can be quantitative (statistical/numeric) or qualitative (expressive).
3. Request for Information (RFI) – Used to gather information about suppliers and their
capabilities prior to a formal procurement process. It used as initial step before sending RFQ or
RFP.

Direct and Indirect Costs

 Direct costs are directly associated with the production of a good or service. E.g., direct raw
materials cost, shipping costs, packaging costs etc.
 Indirect costs are the general running cost of the organisation and cannot be easily attributed to
specific product or service. E.g., salaries, rent, furniture, etc.
Fixed and Variable Costs
 Fixed costs are business costs that remains the same irrespective of the volume of activity of the
business. E.g., Machinery, leases, etc.
 Variable costs vary with output of the organisation. E.g., labour, packaging, raw material costs,
etc.
 Semi-variable costs – these show characteristics of both fixed and variable costs. E.g., repairs,
monthly telephone charges, indirect labour, fuel and power.

Organisational value chain (primary activities) – Michael Porter of Harvard Business School 1985
 Inbound logistics – interactions with suppliers and the activities of receiving, storing and
distributing supplies internally.
 Operations – all the activities which turn inputs into goods and services (the output) to be sold.
 Outbound logistics – activities that receives products from operations, store and deliver them to
the customers.
 Sales and Marketing – activities that finds and keep customers, make them aware of the
products and services on offer and determine prices.
 Service – activities that maintain products after sales and achieve customer care.
The secondary activities (support functions) interact these primary activities and include
procurement, human resources management, technology development, etc.

Producing estimated costs and budgets.

 Break-even analysis – The break-even point is the level of output of a business at which revenue
equals total costs. This point can be stated as fixed cost divided by marginal profit.
If R = sales revenue, V = variable cost, F = fixed cost, Q = number of units to have been produced
or sold at break-even point.
At break-even point, Marginal profit = Fixed cost (F)
Marginal profit = unit profit (R-V) x number of units (Q).
F = Q x (R-V),
Q = F/(R-V).
 Purchase cost analysis (PCA) – Analysis of the cost of individual materials, components and
activities that make up a purchased item. This analysis answers key procurement questions “Is
the price for goods and services the best it could be?” The way to do this is to use the
segmentation model.
Nature of the purchase

Ongoing
Leverage Strategic
Items purchased in large Items important to distinctive
quantities that are made for stock competency or important for the further
and by many suppliers success of the organisation
One-off

Low impact Critical projects

Low unit cost items Critical projects or long-term capital
investments
Arms-length Strategic alliance
Type of supplier relationship

For the low impact quadrant containing low unit cost items, price analysis makes more sense to be
used that cost analysis. Other applicable techniques are shown below for each of the quadrants.
Ongoing

Leverage focus – cost analysis Strategic focus – continuous

improvement
 Cost estimating  Open-book costing
Nature of the purchase

 Value analysis  Target cost analysis

 Supplier cost breakdowns
 “Should cost” analysis
 Total cost modelling
One-off
 Competitive assessment/teardown
 TCO analysis
 Total cost modelling of the supply
chain.

Low impact focus – price analysis Critical projects focus – life-cycle costing
 Competitive bids  TCO analysis
 Market comparisons  Lifecycle costing
 Price indexes  TCA of the supply chain
Arms-length Strategic alliance
Type of supplier relationship

Target cost setting – The starting point is to carry out a PCA to understand which components of the
product or service are important to the customer. This is followed by relative ranking of the
customer requirements which can be obtained by survey. One way to collect and analyse the data
needed to define customer requirement is quality function deployment (QFD).

Purchase price analysis – An approach for testing whether or not the price paid for goods or services
is fair. There are generally three sources of price comparators.
1. Past/historical pricing – using a benchmark of prices that has been paid in the past with
consideration for inflation, etc.
2. Published prices – Can be found in catalogues.
3. Pricing formula – prices that can be benchmarked for example per square meter, per day, etc.

Approaches to TCO/whole lifecycle costing

Whole lifecycle costing (WLC) is a technique used to arrive at the TCO and considers service costs,
maintenance, disposal, decommissioning any other end-of-life costs. There are three stages to the
approach.
Stage 1 – Planning: Involves defining the objectives of the WLC project with clear outputs that would
inform management decision about the purchase. The Decision support model of WLC can be used,
whereby possible alternatives are ranked based on set of agreed priorities or the Simulation model
which considers the fact that some of the values are not specific but can come from a range of
values.
Another model is the optimization model which is more frequently used to calculate support costs
such as inventory levels or maintenance regimes.
Stage 2 – Preparation: Mostly about testing the various models for calculating WLC. Beyond
choosing the best model for WLC, any further cost components which needs more investigation is
identified.
Stage 3 – Implementation: Here the models are implemented to get results and then recalculated in
due course to find other opportunities.

1.3. Criteria that can be applied in the creation of a business case

1. Objectives – the objectives have to be very clear and one of the ways to test whether it is genuine
is by use of “5 whys” and secondly through issues management by Prof. Igor Ansoff whereby he
identified three sources of information to be from organisational performance (growth, profitability
trend, etc.), internal trends (roles, size and complexity of the organisation), and external trends
(global marketplace, technologies & economic factors).
2. Options – once a satisfactory objective has been developed, different strategy options can be
generated with a peer group using brainstorming techniques. It is also possible to benchmark similar
strategies used by other organisations. Hybrid strategies can be developed by combining features of
an existing strategy with a new one. During the brainstorming sessions, six types of interventions are
considered - Market intervention (via bidding), Technical intervention (via spec. definition,
innovation), Cost structure intervention (via value engineering, lean, six sigma), Work process
intervention (via workflows & joint planning), Supplier relationship intervention and Supply chain
interventions (eliminating unnecessary intermediaries).
3. Cost and benefit analysis – this involves comparing the cost and benefit of each option presented
as some strategies can be considered and adopted for reasons other than commercial (common with
public sector). Costs may be one-off but benefits are often received over time and the effect is built
into the analysis by calculating payback period.
4. Risk assessment – Involves identifying and dealing with potential circumstances or scenarios that
could impact the business. The practice is to list all potential sources, assess the risks and rank them
from minor (1) to critical (4).
5. Implementation plan – At this point, senior management must have reviewed the objectives,
satisfied with the options considered before selecting the preferred one, satisfied with the cost and
understood the risks then a plan can be made for implementation. This include defining roles and
responsibilities, communication strategy, defining specs, schedule, T&Cs, etc.

Benchmarking requirements
Benchmarking is a strategic analytic process of continuously measuring an organisation’s products,
services and practices against recognized leader in the studied area. Navy benchmarking handbook
defines it as a structured process of continually searching for best methods, practices adopting their
good features and implementing them to become the best. It recognizes four main types.
 Internal benchmarking – comparing a business process to a similar process in same organisation
 Competitive benchmarking – benchmarking a product, service or process against that if a direct
competitor.
 Functional benchmarking – comparing similar or identical practices with those of an
organisation outside of the immediate industry sector.
 Generic benchmarking – looks at unrelated business processes or functions in organisations
regardless of the industry.

1.4. Interpreting financial budgets for the control of purchases.

A financial budget is a plan for a defined period, usually twelve months showing either revenues or
costs or both. Without this, an organisation does not know whether it will have the funds to meet
obligations or have surplus to reinvest in the business.
The three main activities involved in budgeting and its management are below.
1. Planning – How the funds will be gotten and where it will be spent.
2. Controlling – Analysing how the money is being spent against the budget and deciding on
actions to take.
3. Decision-making – Implementing actions to correct variances between the budget and spending.
This is also known as the Plan-Review-Do cycle of budgeting.

Categories of cost entries

 Revenue – it is a principle of accounting that revenues in a month be matched with costs in
same month so an adjustment has to be made to the accounts accordingly. This adjustment is
called an accrual.
 Direct costs – cost of items used to make a product or deliver a service. Can be internal costs
such as wages or external costs like items purchased from suppliers.
 Overheads – costs other than direct costs that an organisation incurs (otherwise known as
indirect costs).
 Depreciation
 Bank loan
 Investments
 Dividends, etc. – Payments made to shareholders in return for investing in the company through
shares.

Budget variances
 Price & quantity variance – assuming quantity of raw materials purchased by a business in the
last month is Q1 at unit price P1, cost = Q1P1, Cost this month is Q2P2,
Variance = Q1P1 - Q2P2 - Known as Quantity Variance
This equation can be factored as Variance = (P1-P2)Q2 - Known as the Price Variance
 Labour variance – difference between the budgeted and actual wage costs. Can be further
analysed into wage-rate variance (if more overtime than expected is used) and labour-efficiency
variance (if more hours than planned is spent on a job).
 Overhead variance – occurs when actual overhead is higher or less than budgeted. Can be
further split into volume variance (when overheads are apportioned to products & services and
production varies from planned) and expenditure variance (when actual overhead varies from
planned).

2.0. Market Management in Procurement and Supply (Market>Industries>Segments>Companies)

2.1. Analysing different types of markets utilised by procurement and supply (Market Analysis)
Industries are usually classified into three main groups;
 Primary activities – essential extractive industries such as mining
 Secondary activities – manufacturing
 Tertiary – Services
According to Michael Porter, there are three strategies for competing in the industry – Cost
leadership, Differentiation and Focus on a narrow niche segment.
Industry Classification
Industries can be further classified using a coding system. One of such system is the four digits SIC
(Standard Industry Classification) system which originated in the US and widely used globally.
SIC Codes Industry
0100-0999 Agriculture, forestry and fishing
1000-1499 Mining
1500-1799 Construction
1800-1999 Not used
2000-3999 Manufacturing
4000-4999 Transportation, communications, electric, gas and sanitary services
5000-5199 Wholesale trade
5200-5999 Retail trade
6000-6799 Finance, insurance and real estate
7000-8999 Services
9100-9729 Public administration
9900-9999 Non-classifiable
The codes are often further subdivided, for example by SEC (Securities & Exchange Commission)

Segment analysis
An industry is a market in which similar (or closely related) products or services are sold to buyers.
A segment is a group of products or services that provide specific but different value for their
buyers. For example, car manufacturers segment their products by demographics – one type of car
can be targeted at low-income buyers while another type is marketed as luxury vehicle.
Understanding the segments helps procurement & supply to shape and manage supply markets.
Below are four segment classifications
Product or service-based segments – This type of segment contains not only individual products or
services but also ancillary services such as maintenance or consumables. Group of products can be
sold together or single products bundled with other ancillary services. Factors that can lead to this
form of segmentation includes:
 Physical product size
 Price levels
 Features
 Design
 Packaging
 Performance
 New vs replacement
Segments based on buyers – Factors that determine how industrial markets can be segmented on
basis of buyers include the following.
 Size of buying organisation, technology used or form of product use.
 Buyer’s competition strategy – products to be differentiated at premium price will focus on
quality.
 Buyer’s size – the larger the order size or annual purchase value, the more the bargaining power.
 Ownership of an organisation – e.g., local vs multinational.
 Financial strength – firms’ profitability can determine price sensitivity & purchase frequency.
 Order patterns – firms/buyers with predictable orders such as seasonal are easier to service.
 Consumer markets – marketplace made up of individuals rather than businesses or companies.
Key factors for market segmentation here include lifestyle, language (for media related
products) and purchase occasion.
Segments based on distribution channels – This has major cost implications and the individual
factors that determine channel-based segments include the following.
 Direct sale/retailer vs distributors
 Direct marketing ( direct consumer sales) vs retail
 Exclusive vs non-exclusive outlets – e.g., luxury products like cars (BMW), watches (Rolex), etc.
 Distribution channel mix – some products require use of multiple distribution channels
Segments based on geography – creates segments based on product attributes and cost of different
distribution channels. Key factors include the following.
 Localities, regions or countries – product/service logistics considerations, taxes, regulations, etc.
 Weather zones – zones with warm climate have different needs to those with cold climates. E.g.,
clothing manufacturing.
 Country groupings – different countries have different requirement in terms of packaging and
available logistics infrastructure.

Finding new segments - The key task for procurement and supply is to constantly monitor suppliers
and industries in which they operate in order to find opportunities to reduce cost by means of
segmentation.
Factors to determine segments in an industry are often easy to identify and the following questions
helps to find these factors.
 Can other technologies or product designs deliver buyer needs in a better way?
 Can the product or service be enhanced to provide better value?
 Can buyers needs (reduced price) be met by bulk product/service deliveries?
 Are there other product/service bundles and ancillaries?
 Are there other channels for reaching additional buyers or serving existing customers better?

Analysis of organisations
This is the third level of market analysis and involves understanding individual companies within
each segment of the industry. Knowing the context in which organisations operate (markets,
industries and segments) gives an understanding of the pressures and constrains that individual
companies face.
The next step is to understand how a company organizes itself to meet these pressures and
constraints in a way that is profitable. A useful way to do this is using Porter’s Value Chain Model.
Analyzing organisations simply implies analysis of the value chain which involves breaking down
activities into those that has discrete technologies and costs. By doing so, a procurement
professional can gain useful insight into how suppliers support the buyer’s business and also where
there might be opportunities for cost reduction.

Analyzing Specific Markets – There are many markets in existence but the key ones below will be
analysed. Manufacturing, Construction, Retail, Finance, Agriculture, Services.
In analysing markets, the factors below are considered.
 Objectives – what the company is attempting to achieve within the market (market share,
brand, differentiation, etc.)
 Drivers – key factors that gave rise to the objectives (technology shift, regulatory compliance,
emerging markets, sustainability, income level, rise in demand, social media etc.)
 Governance – rules, structures and institutions in place to guide efforts to meet the objectives
 Ownership – the legal form of the company (partnerships, sole traders, shareholders
 Commodity/non-commodity – extent to which the goods/services are considered to be
commodities.
When analysing a large market, it is best to segment it into different buying groups with essentially
the same or similar needs and organisations whose products or services are aimed at meeting those
specific needs. Analysing a wider market tends to miss out on the different factors that influence
business models of competing organisations as can be seen from large corporations vs small
businesses providing similar products/services.
General approach to understanding and managing markets
Sometimes, understanding and managing markets involves asking several questions which is time-
consuming and not relevant to every market. To simplify this understanding is by use of concept of
“supply positioning” which produces a two-by-two matrix (The Kraljic Matrix) based on importance
of spend category & complexity/risk involved as shown below categories:
 High importance & high complexity/risk
 High importance & low complexity/risk
 Low importance & high complexity/risk
 Low importance & low complexity/risk
Critical factors that determine importance of a category are as follows;
 Value of spend, i.e., the 80/20 rule
 Importance of the delivery to organisation’s service or product
 Universality of service/product offering
 Impact of the category on quality of final product
 Impact on organisation’s plan for growth
The Kraljic Matrix is shown in figure below:
Critical Strategic
Complexity/Supply risk High  Specialist  Critical to own
services/products product/services
 Capacity constrained  High complexity
 Seek continuity of  Seek to form partnerships
supply
Tactical Leverage
 Non-core items  Many suppliers
Low  Simplify procurement  Risk of failure is low
process  Use market competition to
 Aim to bundle items into drive down prices
larger contracts
Low High
Importance

2.2. Competing forces that influence markets

Markets meet the needs of one or more group of buyers. Industries are collection of organisations
whose business is to meet these needs at a profit.
Market analysis involves gaining understanding of how attractive an industry is to the business and a
keyway to do this is via use of Porter’s Five Forces Model shown below.
2.3. Data/Information Sources for Supplier Cost & Prices
Costs are generally split into those that are used in the manufacture of a product or delivery of a
service(direct costs) and those that are cost of support activities (indirect costs). Both type of costs
can be further classified into fixed costs (those that do not change with output) and variable cost
(which are directly related to volume of output).
Information about these costs is collected from the associated operations as part of market analysis
and below are some of the sources.
 Company annual reports – provides insight on suppliers’ annual sales & profit for further
analysis. For instance, the fixed and variable cost of a product can be determined through any
analysis of multiple supplier’s cost(y) vs output(x) plot whereby slope is cost per unit and fixed
cost is intersection on cost axis.
 Market data – information collected, analysed and then sold on a range of markets including
number of companies in the market, trends, market share, segmentation, innovation,
benchmarks, etc.
 Technical data – data provided by organisation’s technical staff which can be used to determine
direct and indirect costs.
 Request for Information (RFI) – process to collect information when the company is not certain
of the details of the product or service under consideration.
 Plant Visits – can provide insight into supplier’s processes and associated costs.
 Discount lists – suppliers will be able to offer discounts for products at maturity or decline
stages.
How to research and use market data to estimate & negotiate current and future prices for
purchased goods and services.

One process for collecting and analysing the data & information is called OWN-IT. An acronym
for five steps in the process.
1. Outline – creating an outline/checklist of info to be researched. Researcher has to be
specific, define what is already known (via mind maps) create the outline & then define the
gaps.
2. Wide search – gives researcher a feel of information available to fill the gap identified in the
first step. Useful resource for this is internet search.
3. Narrow search – involves skim reading of materials obtained from wide search to check
relevance and applicability to the research.
4. Increase in stockpile information – involves storage of all relevant information obtained
from wide and narrow searches for later review and action 5.
5. Transformation of stockpile into new knowledge – involves organising the information in a
meaningful way to discover new insights and utilized for the benefit of the company. Some
of which are explained below.
Purchase price/cost analysis (PPCA) – helps to answer key questions that ultimately
determine the cost of what organisation buys.
Negotiating – involves efforts using the PPCA and knowledge of direct and indirect costs to
get price reduction on products or services.

3.1. Use of Specifications in Procurement and Supply

3.1.1. Different types of specifications used in procurement and supply and sources for
information required to create them.

A specification is a statement of needs which presents prospective suppliers with a clear,

accurate and full description of the organisation’s needs and so enable them to propose a
solution to meet those needs. Three main types of specification are explained below.
 Technical Specification – Most common and shows technical description together with
acceptance criteria that forms the basis of a product. Often produced by national or
international body like ISO but can be adapted by organisations to specific needs.
 Conformance Specification – Conformance is the ability of a product or service to meet
its design spec which provides in-depth detail for both functional (what a product should
do) and non-functional (how a product should operate) requirements and covers
assumptions, constrains, performance, dimensions, weights and reliability.
 Performance Specification – A description of the outputs/outcomes that are expected
with the detailed design of the product or service left to the supplier to decide.
Performance spec can come in three major types – Outcome spec, Output spec and
Statement of work spec.
The starting point for writing a specification is the business requirements definition (BRD) which
sets out what the product or service needs to deliver if all stakeholders are to be satisfied. One
model for identifying business requirement is the RAQSCI model which defines what is needed in
terms of Regulatory, Assurance of supply, Quality, Service, Cost & Innovation requirements.
The next step is to continue to refine the BRD in detail so that potential suppliers can understand
what is required to meet those requirements. A useful tool for establishing requirements is the star-
burst method (using questions of what, why, how, who, where & when at the tips of a six-point star
with element of the BRD in the middle).
Answers to the questions will eventually be reviewed by all stakeholder to assess the potential risks
that may apply and approved as a specification.
Outcomes should be in the heart of specification but there are three major challenges with
outcomes – First is how to measure them, Second is the long-time delay between supplier acting
under spec terms and the achievement of results. The third problem is that more than one output
can affect the outcome and not all may be in scope of the supplier. For these reasons, it will be
preferential to use output specification and assume that the outputs(measurable) will deliver the
expected outcome even if the outcome is not formally measured.
Both the output and Outcome specifications can be supported by a Statement of Work (SoW) which
describes in detail the specific tasks or services a contractor must perform under the terms of the
contract. There are three main types of Sow.
 Design SoW – supplier is instructed as to how the work should be done, quality levels and
requirements.
 Level of effort and material/unit rate SoW – often used in short term contracts and specified
main unit of delivery as an our together.
 Performance-based SoW – provides supplier with the purpose of the project or service.

Sources of information for developing specifications

Standards – As specifications set out what is to be expected from a product or service, standards are
the measures that show that those expectations have been met. This includes level of performance,
quality of material used, safety level in food & drink, etc. they are set out by international & national
organisations like ISO, ANSI (American).
Internet – A powerful tool for finding information to develop a specification or even the specs itself.
However, any info from internet should be checked for reliability & accuracy. A useful acronym for
check is SAMOA meaning Source (of information), Audience (intended recipient), Methodology
(used to collect & analyse data), Objectivity of the info & Accuracy.
Suppliers – It is always a good idea to get supplier views early in developing complex specifications.
This is often a market testing/market sounding exercise carried out for many reasons from whether
a market exists for the product/service to potential cost & affordability if it does. This collaboration
with supplier early in the procurement cycle is often referred to as early supplier involvement (ESI).
It can also bring about Shared trust between buyers and suppliers, Reduced risk, Supply chain and
Process improvement. Key steps in ESI are:
1. Establish customer need, 2. Identify a project, 3. Develop target cost, 4. Prepare project plans,
5. Collaborate with operations, 6. Produce list of potential suppliers, 7. Engage in supplier
workshops, 8. Conduct value engineering studies.
Directories – Also a useful source of information for standard products that fall into the technical
specification category. Example is the National Directory of Commodity Specifications in the USA and
ISO directory covering over 22,000 international standards.

3.2 Specifications for through-life contracts.

Through-life contracts are common when procuring asset such as machinery or IT equipment. It
gives a contractor the sole accountability for the six main activities of Design, Acquisition, Operation,
Maintenance and Eventual Disposal of the asset.
Scope of through-life specification – The scope of through-life specification needs to cover all the six
main activities and reflect the benefits such as lower cost over life of asset, lower risk due to single
accountability, closer match between delivered asset and client’s need and capability development
over asset life.
User requirement definition – This is the first and most critical step in producing user requirement
for a through-life specification. Considerations when drawing up a definition include: Producing a
user requirement document (URD), Identifying user requirements through research, Making sure
that the functions, attributes, constrains, preferences and expectations for the product/service are
fully explored and any trade-offs between them agreed. Every important aspect of the specification
needs to be documented and reasonable limitation of liability and warranties included with clarity
on insurance and audit trail of any changes to the spec.
User requirement description – A clear description of the product/service requirement that focuses
on the key needs of the user.
Testing and Acceptance – The process of determining whether a product meets its specification
before it is released to a customer. There are five main types of testing;
 Alpha & Beta testing – takes place during the development phase and generally involves
contractor employees. The results are used to modify the product for better spec compliance.
Beta testing takes place on the customer’s premises and involves customer staff using the
product in real-life environment.
 Contract Acceptance testing – here, the product is tested against criteria and standards that
were set out in the predefined specification.
 Regulation acceptance testing – tests the product against compliance with any regulations
required by law such as HSE.
 Operational acceptance testing – usually the final testing to confirm that all operational
functions of the product are in working condition prior to release/handover to customer.
 Black box testing – most commonly used in software testing. It focuses on inputs and outputs
without consideration for the internal workings of the product.
Change control mechanisms and remedies – procedure for identification and managing changes
which are bound to happen during specification development. Below are the steps for MOC.
 Identify the change – needs to be clearly described in a change request document
 Review the change – input is needed from all project team members
 Look at options – involves review of possible options for proposed change accompanied with
data to support the preferred/recommended change.
 Approve or reject change – the decision-making process should already have been identified
with key decision makers. An approved change is incorporated into a revised spec and updated
project plan.
The final product is more likely to meet customer’s expectation if this four-step process is followed
for all change requests.
Social and environmental criteria – Social criteria is focused on the social value of a business, or
social capital which is the sum of the knowledge, experience and skills of the workforce with the
total value people put on their health and wellbeing. Factors that influence social views or a
company include:
 Media views
 Work ethics and practices
 Brand, company and technology image
 Lifestyle trends, Cultural taboos, Publicity
 Consumer attitudes and opinions with their buying patterns
Environmental criteria are factors in the physical environment in which business operate that can
affect how it performs financially. These include;
 Recovery from natural disasters
 Management of waste emissions
 Pollution, Energy efficiency.
3.3.Risks that can result from inadequate specifications and mitigation approaches.

According to Karl Wiegers in 2001; Industry data suggests that approx. 50% of product defects
originate in the requirements and 80% of rework effort on a software development project can be
traced to requirement defect. Inadequate spec can come in the forms described below.
 Under-specified need – greatest risk is having product or service not meeting user requirement.
 Over-specified need – major risk is greater expense beyond viable limits
 Misinterpreted need – risks can be a combination of the above risks and more resulting from
time overrun and increased cost from reworks.
The four phases of managing the probable risks are:
 Risk identification – all potential risks that might be associated with the specification are ID’d
 Risk assessment – Describes the impact of the risk if it occurs, likelihood of the risk being
detected before occurrence, and likelihood of the risk being eliminated.
 Risk control - Involves risk mitigation by either Tolerating, Treating, Transfer or Termination
 Risk monitoring – A risk register is utilized to list all identified risks with unique identifier, date,
allocated owner, description, action taken to mitigate the risk, etc.

How to monitor specification creation by colleagues and other internal stakeholders.

The first step in monitoring the creation of a spec by others is to define success in terms of a
completed specification. Identify the overall sponsor for the specification project, key stakeholders
and establish with them what success is.
The second step is to write the equivalent of a Project Initiation Document (PID) which is used to
document key parts of the project for reference and also to act as vehicle for collecting necessary
approvals. The PID sets out the scope of the spec definition project.
The third step is to measure and monitor actual performance of spec definition. Popular metrics for
this include:
 Schedule variance – difference between planned timeline vs actual project timeline
 Cost variance – difference between planned cost vs actual cost. Consideration should also be
given to opportunity costs.
 Stakeholder satisfaction – difficult to measure but stakeholders can be asked to fill-out a
questionnaire.

3.4.Regulating short and long-term specifications

There are two ways to regulate specifications.
Standardization of products or services whenever possible – Standardization occurs at 3 different
levels in manufacturing.
 Individual parts and components (parts standardization) – involves simplifying range of parts or
materials used in production. One good way is the use of zero-based approach which involves
eliminating all and every components, parts or personnel (for services) that are not required.
 The end products being manufactured (product standardization) – target here is producing
products or delivering services without variations/defects. This has significant input from
standardization of production processes and machines or personnel for services.
 The process(es) used to make the products (process standardization) – example:
 Job shops which can produce wide range of products, each calling for different range of
materials, parts or components.
Production cells where manufacturing process is divided into smaller groups that make sub-
assemblies that are similar in terms of parts or equipment used allowing batch component
production.
Flexible manufacturing System (FMS) which is used to produce goods that are readily adaptable
to changes in product type and quantity. Very efficient process and involve use of computers.
Mixed lines produce small quantities of different products with quick changeover in set-up
between production runs increasing efficiency.
Production cells, FMS and mixed lines are often referred to as batch production as products are
made in small quantities per time compared to one-off nature of job shops.
Final method is dedicated lines often referred to as mass production where a small varieties of
products are made as the set-up cost for production line is high. Often used in automotive
industries.
Overall, standardization increased from job shops to dedicated lines and same with part volume
and variety of products manufactured.
For service companies, one way to go about standardization is by the concept called “ Lean”
which is also applicable to manufacturing. The concept was invented by MIT team led by Jim
Womack from investigating Toyota’s business in the 1980s. Lead is about maximizing value at the
same time minimizing waste while delivering the value. Lead has its own concepts as listed
below.
 Concept one – lead time (LT) & process speed. LT is the time it takes to deliver a
product/service once order is placed. LT = (Amount of work-in-process)/(Average completion
rate)
 Concept two – work-in process (WIP) which relates to activities in process like e-mail inbox
waiting to be read or PO waiting to be processed.
 Concept three – Delays (or queue time) which exists whenever concept two exist.
 Concept four – value-add and non-value-add. Value-add work are the ones that a customer
will willingly pay for; anything else is non-value-add and targeted for elimination.
 Concept five – process efficiency (PE) which measures % of time that work spends in value-
adding activities. PE = (value-add time)/(total lead time).
 Concept six – waste which is anything that adds no value in the eyes of the customer. Can be
time, cost or work.
In processes that have not been through lean assessment, it is usual to find that at least 50% of
work is non-value-added. Process wastes can be summarized with the acronym “DOWNTIME”
which means Defects, Over-production, Waiting, Non-used talent, Transport & handling,
Inventory, Motion Waste, Excess processing, etc.
Standardization generally leads to unit cost reduction, improved quality, production flexibility and
operations responsiveness.
Techniques such as value analysis and value engineering to ensure max. value at min. cost
 Value analysis – this is a systematic process for improving value of product, service or project
and typically used to determine the value of each component used and to find cost reduction
opportunities. A common way to identify costs is through target costing which can be done in
four steps.
 Deciding on selling price that will be accepted by the market
 Deciding the minimum profit level that is acceptable
 Taking the profit from the selling price to arrive at a target cost
 Starting a project to identify ways to reduce the current actual costs to the target level.
Below is the process for carrying out value analysis
 Gather information – through specs, drawings, datasheets, reports, etc.
 Carry out functional analysis (FA) – this is the core of value analysis and involves identifying
key components of the product/service and determining their functions which can either be
primary or secondary. An FA technique called quality function deployment (QFD) can be
used to link customer requirements to the functions of a product & service and then
evaluate their relative importance & cost. An alternative to QFD is called Pugh analysis which
involves comparing multiple and different options against a baseline and find out which
solution is better and which ones are worse.
 Be creative – creativity is an abundance of ideas that are more than just superficial changes.
Roger Von Oech identified ten things that can get in the way of creativity to include: Right
answer context, Logic, Rules, Being practical, Perceiving play as frivolous, Lack of interest,
Avoidance of ambiguity, Not wanting to appear foolish, fear of failure, Natural lack of
creativity. The first step in creativity is to define the problem/issue in a way that enables
them to looked at differently.
 Evaluate -
 Develop