Skip to 0 minutes and 8 secondsHello, Learners. I'm John Bancroft, your mentor for week 3, 'Shop Till You Drop'. Katherine's week followed five key questions, which are fundamental to any sourcing decision. And we will review each of these aligned to the blocks of the week. With Katherine away this week, I'm here with Professor Jan Godsell to round off our week where we focus on procurement. Hi, Jan. How are you? Hi, John. I'm good. I'd prefer to be in South Africa with Katherine, but hey. Don't we all. So starting with block one, we considered what needs to be purchased. And the main focus of this block was to understand what a buyer expects from its supplier. In other words, what are the buyer's requirements and specifications.

Skip to 0 minutes and 51 secondsAs we discussed in the week, there are three core elements that typically shape specification. First we have quality, in other words, the product's performance and the ability to satisfy the customer's expectations. And of course we also have to consider the cost. It's important to not only consider the price paid for the product, but any other changes incurred, or charges incurred, such as delivery and the cost of ownership. Finally, we must also consider the delivery. How long will it take for an item to be delivered, and how responsive is that supplier to any changes that we make?

Skip to 1 minute and 26 secondsSo Jan, much of the discussion in this block revolved around the horse meat scandal that we saw in the UK in 2013, where after random food inspectors tested discovered that many beef labelled products contained horse meat. So how can we avoid these kind of issues occurring in our supply chain and make sure that the product specification is aligned with the customer's expectations? That's an excellent question. And actually this week's discussion was quite heated and interesting. It was very interesting to see the tension between people thinking that if something was cheap, there should be an expectation of low quality. Yes.

Skip to 2 minutes and 9 secondsVis-a-vis some of the Learners discussing that there's a basic level of quality that you would always expect regardless of the price that you pay. So for instance in the horse meat example, just because you were buying cheap burgers, you'd still expect them to be beef. You wouldn't expect them to be horse meat. Exactly. So what that made me think about, actually, was a framework that I used, actually, as an MBA student. It came from a book called Exploring Corporate Strategy by Johnson and Scholes. And it talked about perceived use of value analysis. Because I think quite often when we're making our buying decisions, we forget that we as humans make different situations in different contexts.

Skip to 2 minutes and 50 secondsAnd what we're more than often willing to do is to trade off our value bundle against price. But perhaps the best example for me of this is air travel. There are different ways that we can travel these days, by air, and there's different prices. So you can travel with a main flag carrier, which typically is more expensive than travelling with a budget airline. But what you then expect in terms of service, in terms of what the perceived use of value is, normally you'd expect that to perhaps include the ability to choose a seat, the ability to take a bag with you that would all be bundled into the cost, and you'd expect food and some free drink.

Skip to 3 minutes and 30 secondsWhereas if you make the choice to fly with a budget airline, all of that's stripped away. You get very basic A to B travel, but the price is lower. I think another aspect of this though is supply chain visibility. And this is something that we'll see changing massively as we go forward.

Skip to 3 minutes and 45 secondsI think whether or not as an individual we choose to purchase on social or environmental considerations, one of the things that will certainly happen going forward - and we can see it in the UK now with the new Human Slavery Act - is that organisations will have to take much more responsibility for actually giving visibility to consumers about the social and environmental, as well as the cost aspects of their supply chain. Yes.

Skip to 4 minutes and 14 secondsOK. So moving on to block two. We thought about what does a potential supplier look like. The main focus here was to realise the value in knowing the supply market and what suppliers are capable of offering in relation to our organisational requirements. Of course these characteristics vary greatly depending on the industry and the product type that we're dealing with, whether dealing with simple goods where there is little variation, or complex tailored items where the item is very specific. We also have to be aware of the power dynamics in the marketplace and how this will affect our relationship with suppliers.

Skip to 4 minutes and 52 secondsSo thinking about this, Jan, what are some of the key considerations that we should be aware of when selecting a supplier? So again, I think the discussion on this was fairly varied and I think it's quite interesting for me. When I started looking at supply chain segmentation about 15 years ago, there was an article by Marshall Fisher in the Harvard Business Review which actually tried to link different product types. So in this case, like an innovative, or in the language that the Learners have been using this week, a high cost or complex item, to a particular type of supply chain response, which got labelled as agile. It's where you require a more responsive response.

Skip to 5 minutes and 37 secondsAnd then sort of the commodity items there's sort of an assumption that you would have a more lean or basic response. I think in some of the discussion people began to talk upon, they picked up on the Kraljic matrix, which is another - I think they did it in 1982 or 1983 - but again, a very classic HBR, Harvard Business Review article. And I think these types of two-by-twos, they're what we call ideal types. And they help you position things, but the reality is nothing is an ideal type. And I sometimes it can be over simplistic just to assume that because a product is complex, it requires a strategic supplier.

Skip to 6 minutes and 17 secondsAnd just because something is simple, it requires a commodity approach. It can be more nuanced. And if you link this back to last week, Week 2 on planning, what we could actually see is that actually sometimes, for exactly the same item, you could have two different demand profiles. So sometimes the demands could be stable, and it may have an overlying, more variable demand pattern. And actually, how you choose, not necessarily... it could be a different supplier, it could be how you choose to engage with the same supplier - might actually vary.

Skip to 6 minutes and 53 secondsSo I don't think there's any one single answer as to how you select a supplier. But I think some of the frameworks that are out there can help you. But they're a starting point, not the end point. And we perhaps need to realise that the world's more complex and more nuanced and there could be other layers you need to put on top of that decision. Definitely. Yeah, they are simplified, to offer a viewpoint. But as you say, they could definitely be more nuanced. Thank you. So moving on to block three, we considered the question, which buying approach suits best. Here we focus on understanding the approach we take and the type of relationship we should have with our suppliers.

Skip to 7 minutes and 33 secondsAnd the answer to this, of course, is linked to the complexity of the market that we're operating in and the ability of the suppliers to help us operate within that space. This could include decisions such as whether to work with more than one supplier for a particular component, but also to the extent that we're willing to collaborate with the supplier. So thinking about this block, Jan, how can a buyer or how does a buyer decide the best strategy or the best approach for actually working and engaging with its suppliers?

Skip to 8 minutes and 6 secondsAgain, lively and varied discussion through this part of the programme. And maybe I'm going to take a slightly different perspective again to this that maybe Katherine would have taken, because again, linking back to some of our work around segmentation and thinking about how you create flow, quite often we've looked at procurement decisions in isolation to the rest of the supply chain. So you can make a procurement. And actually, there's quite an interesting discussion around the difference between procurement and purchasing. And I think you have quite a good explanation of that that maybe you can come back to, John.

Skip to 8 minutes and 47 secondsBut for me, one of the dangers is just looking at things like which buying approach suits best in isolation to the rest of the supply chain. So there's examples that I've seen in the past where a procurement function's been offered the opportunity to buy a product, say, for instance, nappies in bulk, towards the end of a financial period because the manufacturer wants to get rid of them. The procurement department gets them at low cost and they think, great, I've got a really good deal for this product. What they've not thought about is that actually something like nappies are a really, really bulky product.

Skip to 9 minutes and 26 secondsAnd then they're going to actually have to go out and lease a warehouse to hold this product for the next six months whilst they consume the demand for it. So potentially the procurement cost was low. From a procurement perspective, they got a bargain. But if you were to look at it from an end to end supply chain perspective, you've had additional warehousing costs, which actually could have made the overall supply chain cost higher than just the purchasing cost. So for me, I think it's taking some of those models and points that Katherine raised, but actually just thinking about them in terms of the context of the supplier. But also recognising, again, there's no one size fits all.

Skip to 10 minutes and 6 secondsSo for some organisations, they make the decision to sell source because they want to have a really strong relationship with their supplier and they want to reduce complexity. So for instance, years and years ago when Southwest Airlines first started up with the first low cost airline, one of the innovative things that they did it was single source their aircraft, because that had a whole knock on effect in terms of staff training, in terms of maintenance costs. And I'm sure initially it had some benefit, in terms of having negotiated with the provider. Now, other people would say, oh, but if you put your eggs in one basket, you're then exposed when it comes to renewing the contract.

Skip to 10 minutes and 49 secondsYou could be vulnerable. Whereas I see in other situations where, of course, my chain vulnerability perspectives, if one factory was to burn down, then where's your alternative source. So you could still have the same supplier, so it's still the same supplier, but you ask them to dual source your tools or your products for more than one factory in their network so that you've got contingency if something goes wrong. In other situations, you may actually choose to go to two totally different suppliers because you actually feel there's some benefit to gain, usually because you want to negotiate. You want to play one against each other in terms of cost.

Skip to 11 minutes and 27 secondsSo it's horses for courses, but please just think about it in terms of the broader supply chain, not just the procurement function. Yeah. Regarding your point, as you mentioned, end to end and considering how one decision may impact in other areas of the business is something that should always be in our minds. But John, could you just clarify a little bit, because I feel it was an interesting discussion about what's the difference between procurement and purchasing, which I appreciate some people... there's lots of views on this. But I think... Yeah, of course.

Skip to 11 minutes and 58 secondsSo for me at least, I feel that purchasing is very much the transactional side, the routine administrative aspect of actually paying for a product, whereas procurement is a much wider viewpoint or responsibility all the way from the identification of needs, what products, what items do we need to operate our organisation, to the quantities etc. But also even to the end of life of an asset. How do we dispose of it even at the end? So procurement, I would say, is a kind of larger umbrella of not only what items are we buying, but also identifying them. Whereas purchasing is very much the transactional and routine part of the equation. And that's great.

Skip to 12 minutes and 49 secondsSo which suppliers do we select, was the focus of block four. And the main purpose here was to understand the considerations that we have to make when selecting a supplier. And ultimately it's essential that we choose a right supplier for our organisation that can meet our needs, but also match our values that we hold. Of course when making this kind of critical decision, we need to be aware of the total cost, and not only the unit price that we're paying for the product.

Skip to 13 minutes and 17 secondsThese additional costs could include pre transactional costs, such as the time spent investigating the supply market, transactional costs, such as delivery, tariffs, duties, and the return of faulty goods, even, but also the post transactional costs must be considered, such as maintenance and the disposal costs at the end of a life of that product or equipment. So with this in mind, how can we ensure that we're choosing the right supplier for our organisation's needs?

Skip to 13 minutes and 48 secondsSo I think Katherine did a great job at describing those different types of costs. So maybe I'll give a slightly different spin of this in terms of whether or not you're going to... in this day and age, those pre and post transaction considerations can come together to actually make you think more about what am I purchasing. Am I purchasing and building on the discussion? Am I purchasing a simple product? So if you were to take, for instance, the purchase of an engine for an aeroplane, I could go to an aeroplane supplier, such as Rolls-Royce, and just buy an engine. However, I could equally go to a Rolls-Royce and I could buy Power-by-the-Hour. I could take their fully servitised proposition.

Skip to 14 minutes and 37 secondsBecause essentially, for something like an aero engine, those types of pre and post transaction costs actually break down into two different supply chains. There's the supply chain for the actual engine, and then there's the whole supply chain for what they call Maintenance Repair and Overhaul. So actually, when you're making a purchasing decision, you're making a decision about how much do you link the two together. Similarly, I've made a recent purchasing decision at home to buy a printer that uses HP instant ink.

Skip to 15 minutes and 9 secondsSo my consideration was what do I want to achieve. I never want to be out of ink because I never want my son to say he can't hand in his homework because he can't print it off. So previously I would buy a printer, normally in distress, because it was actually cheaper to buy a new printer than it was to buy ink. And then we did intermittent printing, and every time you'd go to print, ink was dried up or not working. And there was a mad dash to a supermarket to get some ink to be able to do whatever you needed to do.

Skip to 15 minutes and 40 secondsSo it actually worked out quite expensive, because I always replace the ink three or four times a year, which would be costing me somewhere in the region of £120, but also not very pleasant in the terms of being quite frantic. Instant ink is a servitised model. It also supports the concept of a circular economy that you'll learn more about in week six. So now I pay a subscription to HP. I buy an instant ink enabled printer. I pay £3.50 a month. I can print 100 sheets a month for my £3.50 in either colour or black or white and they guarantee that I would never run out of ink. So in a way, it's taken away.

Skip to 16 minutes and 22 secondsMaybe I'll have some slightly more pre transaction considerations in terms of I was thinking about what I wanted to achieve rather than what I wanted, particularly from a supplier. But it brought together both that pre and post transaction to actually mean that I'm buying, in a way, a printing service, as opposed to just buying ink or just buying a printer. And so for me, it's really about, thinking about, when we select a supplier, it's thinking about that supplier in terms of what do we want them to provide.

Skip to 16 minutes and 58 secondsAnd is there a way of collapsing some of those different costs together through a new business model, a new way of interacting with that supplier that can give us more value, or actually is it still best for us. So Rolls-Royce still sell a lot of engines because some people work out that it's actually better for their airline to do maintenance repair and overhaul themselves. Whereas others prefer to buy that full service. I guess it just depends on the organisations, where they want to spend their time and their focus. Yeah, and I suppose this is one of the things we don't necessarily think about, which is the cost of management time.

Skip to 17 minutes and 36 secondsYeah, it's definitely a worthwhile consideration. You know, how much time you're going to have to spend managing this. Yeah. OK. Thank you. So finally, in block five we considered the question, how can we improve. And behind improvement, there are really two main motives. It may be that the performance has fallen below the expected or the desired level that we have, or simply there is a desire to improve performance generally to become more competitive or profitable within that space. To measure and monitor performance, it's important that we identify the relevant key performance indicators and to carefully monitor these. While some may use KPIs as a trigger to penalise suppliers, the real benefit really comes from identifying improvement opportunities.

Skip to 18 minutes and 24 secondsWe read about the case in this block of the US retailer, Target, and their plans earlier this year to be stricter with their suppliers and actually apply penalties of up to $10,000 should there be an issue with a product or shipment. So thinking about this situation, Jan, is this kind of hard approach a good idea to ensure that suppliers perform, and even improve, or should we be treating our suppliers a bit better and with a bit more kindness?

Skip to 18 minutes and 56 secondsFundamentally I think this comes down to the culture of your organisation and how that you actually want to approach your supplier management, because this, in a way, is how you're going to approach supply management. For me, I'm probably very biassed away from very draconian, stick-faced ways. So that's probably part of... and it will come down to not just company values, but individual values too.

Skip to 19 minutes and 29 secondsWhen I worked for Dyson, and so this would be late 1990s when Dyson was just becoming really successful in the UK, we essentially had more demands than we had supply for. And at the time, Argos, the UK retailer, was the only person that could actually demonstrate if they lost a sale because they were out of stock of our product. And they potentially would fine you for the loss of sale against a contracted volume that you should have delivered into them. And I have to be honest.

Skip to 20 minutes and 6 secondsIn those times of allocation, it did focus the mind and you perhaps did consider Argos in a slightly different way to other retailers because you knew that you potentially did get a penalty because they could physically show that they missed a sale. What, I would equally say, though, by highlighting that, we were very careful in terms of what we negotiated in terms of committed deliveries to them, because we also needed to make sure that we could supply product to all of our other customers too. So I think what it made us do was be quite realistic in terms of expectations setting, in terms of what they wanted, but what we could actually realistically achieve against that.

Skip to 20 minutes and 51 secondsAnd so in a way, the metric worked quite well in terms of making sure that our expectations were well aligned. Personally, I would generally say that we should use metrics to drive improved performance, as opposed to penalise people for poor performance. Because quite often it can be quite difficult to actually... so have you performed badly because you were given a bad demand signal, the customer changed their mind, they requested extra volume at very, very short notice, which put your supply chain under stress? Or did you perform badly because of an issue within your own business?

Skip to 21 minutes and 33 secondsI think most importantly, and where I've seen KPIs used incredibly well, in terms of supplier management, is when they are used regularly with a view that to collectively you use them to identify root causes of problems, and then actually set out to jointly put those... to solve the problem. If you were to have someone that's continuing to perform badly, then actually there are different ways to deal with them, I think, other than fines. And you'd probably, ultimately, if someone just continued to perform badly, would stop dealing with them. Yep. I think it's very important, as you mentioned, that we use these KPIs together. It's not just for us to make a point or a statement.

Skip to 22 minutes and 18 secondsBut it's how can we use them for the better and how can we improve upon them. So thank you very much, Jan, for your discussion. And thank you to all of our Learners this week for your contributions.

Skip to 22 minutes and 33 secondsYeah, no, thanks John. It's been a great week. I've learned lots too. Obviously this is Katherine's area of subject matter expertise, and John's. But I look very much forward to welcoming you to next week when we will be looking at manufacturing for the future. So see you then. Thanks, Jan.

Week 3 summary

Please return here at the start of Week 4 for the round-up video for Week 3.

Week 3, focused on the topic of ‘Shop till you drop: Purchasing and procurement in context’. Before immersing yourself in the world of manufacturing, take some time to consolidate your learning from last week by watching the summary video.

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This video is from the free online course:

Supply Chains in Practice: How Things Get to You

The University of Warwick