Summary CIPS L4M4

CHAPTER 1

(1.1)

Sourcing is the part of the procurement strategy where prof to find suitable organizations to become
the suppliers of products or services. Can be Tactical: low level decision -making, low risk items, short
term projects, transactional relationships or Strategic: top level decision – making, high risk, long term,
collaborative relationships. Has a cost of salary, resources, training, developing procedures and time,
therefore with Kraljic Matrix (Non-Critical items, Leverage, Strategic, Bottleneck (Figure 1.3)), you can
define if Tactical or Strategic is best option. Always use Tactical except for Strategic items. It would not
be good business to allocate high costs to sourcing a non-critical purchase.

Sourcing aims to achieve BBM, considering: Price, Delivery, Quality, Ethics, Sustainability, and
Availability (table 1.2). Novack and Simco set out 11-stage sourcing process, CIPS 13-stage Procurement
Cycle (figure 1.1)

Outsourcing is contracting external supplier to manage and run functions that was previously done in-
house for reasons like, financial (lower operating costs), technological, resource (avoid additional staff
and training), skillset, improved focus (enable to core focus), and to reduce risk. Core activities will
normally remain in-house. Cost/Benefits for Outsourcing (Table 1.5) Outsource Matrix (Figure 1.4):
Eliminate, Strategic Alliance, Retain In-house, Outsource (NO for core functions, YES for operationally
important functions but not key to strategy like, IT Support, Catering, Cleaning, HHRR). If not working or
strategy changes you Insource the function which means bring it back in-house.

Risks in Outsourcing (Table 1.7): Loss control, supplier reliance, confidentiality, quality, intellectual
property, reputation, loss of expertise, inflexibility, cultural differences (time, language, standards).

Outsourcing is developing markets in low cost countries with benefits of costs and growth in core
activities of developed countries, increase employment and promote ethical and sustainable behavior
for developing countries.

TUPE regulation in UK which protects employers in mergers, acquisition and outsourcing ensuring
individuals keep their jobs as new suppliers will maintain them and same terms of employment.

Make or buy decisions, take into account: product/service is core, the organization’s capacity to make,
current market (cost saving w/economy of scales and/or logistics), amount of competition (if low, high
price, better make). Porter’s 5 forces can be used to examine competition (1. Threat New Entrants, 2.
Bargaining Power of Buyers 3. Threat of Substitutes 4. Bargaining Power of Suppliers 5. Rivalry Among
Existing Competitors). Buyers should review Advantages/Disadvantages for Make or Buy (Table 1.3) and
consult w/stakeholders before decision.

Supplier pre-qualification or criteria for appraisal should be always carried out. First compile list of
potential suppliers (previous knowledge, recommendations, internet, market publication, trade shows,
network, advertising contract opportunity.

PQQ (pre-qualification questioner): to answer if supplier is financially stable, has relevant experience,
accreditations, has the capacity to commit, follow ethical and sustainable practices. PPQ aims to cover

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Carter’s 10Cs (Competency, Capacity, Commitment, Controls (quality/processes), Cash, Cost,
Consistency, Culture (fits w/buying org), Clean (environmentally) Communication).

Appraisal of Suppliers: evaluate short-listed suppliers in more detail against more specific criteria. At this
stage, remove suppliers w/risks like, quality, delivery, breach of contract, environmental damage,
financial concerns, reputation damage. Appraisal process must continue after award as market or
environmental conditions may change (using KPI’s or SLAs). Changes can be Internal (micro) or External
(macro) (Fig. 1.5). KPIs can be qualitative or quantitative and must be SMART (specific, measurable,
achievable, relevant, time bound).

(1.2)

Single, Dual and Multiple Sourcing (Table 1.8 Adv/Dis)

Single: where one supplier is contracted to supply all needs for an item, because of monopoly, or
economy of scales is achieved or very small order quantities, or 1 supplier offers outstanding value for
money. This enables logistical cost reductions. Partnership or strong collaborative relationship
w/supplier.

Dual: 2 supply all needs for an item when there’s risk of one failing to comply or product/service is
critical to the buying organization. Strong relationship and collaborative in form of Strategic Alliance.

Multiple: many suppliers supply all needs for an item when supplier competition is vast, or supplier
relationship is not critical, or constant supply is critical. Relationship w/supplier is transactional as it is
not critical.

Tendering Process (Figure 1.7)

ITT: more formal, most used by public sector for high value. RFQ: less Formal

Open tendering: commonly used globally. When expect limited interest so fewer bids to evaluate. Some
situations EOI first and then ITT sent to responders. Bids opened against predetermined evaluation
criteria, awarding to supplier w/BVM.

Restricted Tendering: buyer advertises EOI and responders are sent a PPQ. It’s a 2 stage processes,
when high interest is expected, it enables to create shortlist of suitable bidders, that will progress to
more detailed evaluation.

Negotiated Tendering: same process as restricted but usually used when there is one bidder or when
requirements are complex. Chooses the supplier because it’s the only one, or due to a previous
relationship or involves amending or expanding an existing contract. Reduces costs and duration of
tendering but risks that buyer reuses same supplier and not seeking for a better one and may be hard to
reach fair agreement for both parties due to lack of competition.

Sourcing involves negotiating w/suppliers regardless of type of sourcing used. 5 possible outcomes:
win/lose; lose/win, win/win, lose/lose and Compromise (neither win). See figure 1.8.

Styles of negotiation can change depending on the relationship and desired outcome.

Competitive: based on achieving results even if disadvantage to the other party and the long-term
relationship.

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Negotiating Process: 1. Preparation (where, ideal outcome, relationship style, issues, concession, back-
up plan) 2. Information Exchange 3. Bargaining 4. Closing (table 1.9). When negotiating w/1 supplier
outcome should be win/win as likely will be long-term agreement, with multiple or dual, win/win is less
important as there are other options.

Intra-company trading: business between companies owned by same entity. May be between two
departments on site or divisions in different countries. Often occur when departments have each their
own budget. Procurement can be involved by sourcing and securing supply that will then be sold to
departments to avoid overuse or lack of control or care. This is Centralized Procurement which can
benefit from Economy of Scales. Once materials are sourced and at central location, departments place
orders. At this point intra-company transaction takes place. Holding department arranges delivery and
invoices cost adding mark up for storage, administration, and delivery cost. It can include Profit Margin.

Devolved Procurement: were individual locations are responsible for their buying activity.

Transfer Pricing: money payable between division of same organization that have conducted business. It
is audited to ensure no dishonest activity like tax evasion. They are large part of international intra-
company trading. The aim is to push profits into global areas where taxes are more favorable. Although
not favor home country’s economy they are valuable for economies of the countries they pay taxes to
(table 1.10 adv/dis).

Inter-trading: business between companies owned by different entities.

OECD: produces set of guidelines for transfer pricing which include strategy, legal implications and
regulate international tax laws.

International Sourcing: supplier of different country of buying org. Standard Product Sourcing,
Outsourcing or Offshoring (relocation of part of a business to reduce costs).

Benefits are reduced costs, exposure to world class technology, get materials which are not available or
of better quality than in home country and wider selection of suppliers which gives more competition.

Risks are extended lead times, importation/exportation regulations, currency exchange fluctuation,
payment methods and guarantees, cultural differences, quality issues, different standards and ethical
behavior, logistical problems, property rights, conflict harder to resolve.

Selection Criteria, to select suitable suppliers must define criteria and useful tool is Carter’s 10 Cs
(Capacity, Cash, Clean, Communication, Commitment, Competency, Consistency, Control, Cost and
Culture). Buyer can send PQQs with details on:

1. Quality Assurance: Performance Specifications (supplier can meet specification however they think is
best) or Conformance Specifications (structured and detailed los recipes and chemical formulas). Other
ways to evaluate quality are Continues Improvement/kaizen which has 4 stages (Identify, Plan, Execute,
Review) and its objective is to eliminate waste that can be anything that does not add value during
process. Ohno 7 key wastes (Motion, Inventory, Over-production, Waiting, Defects, Over-processing,
Transportation) and Total Quality Management (TQM) which is and approach towards strategic success
through complete costumer and consumer satisfaction. It includes Continues Improvement (Fig. 1.13)

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2. Environmental Awareness and Sustainability: contribute positively to environment, replace natural
resources, gives back to community (can request Corporate Social Responsibility (CSR)).

3. Technical and System Capabilities: should request samples, check compatibility between buying org
systems and those of the supplier.

4. Labour Standards: check no modern slavery and compliance with ILO policies

5. Financial Capabilities and credit rating scores: financial stability, cash to buy raw materials. A credit
check maybe carried through 3rd party.

Due diligence: appraising a supplier to ensure it’s a suitable match for an organization. Accomplished by
conducting credit checks and evaluating against Carter’s 10 Cs. Financial issues can cause delay in
deliveries or cease of trading or inability to invest in up-to-date technology or difficult to lease. Asses
supplier dependency on buying org. to get idea of style of negotiation to use.

Ratio Analysis: part of due diligence to give overview of Profitability (revenues-total costs), Liquidity
(availability to meet liabilities (short-term debts) from current assets), Gearing (how business is being
funded, based on its ratio of debt to equity) an Investment. Calculation info comes from financial docs
that orgs produce like Statement of Comprehensive Income (summary of income and expenditure over a
period), Cash Flow Forecast (shows sources of cash coming and ways it’s spent) and Statement of
Financial Position/Balance Sheet (assets and liabilities on a particular day).

Profitability Ratios: measures extent to which an organization has traded profitability over a period,
Gross Profit Margin, Net Profit Margin, EBITDA (these demonstrate ability to convert sales into profits
and ability to manage cost base), Return on assets, Return on Equity, Return on Capital (ability to
generate money for its shareholders (table 1.11)

Liquidity Ratios: calculate availability to meet liabilities (short-term debts) from current assets. Current
ratio is total current assets/current liabilities. Acid ratio or Quick ratio is total current assets – stock
(inventory)/current liabilities.

Gearing Ratios: how much of an orgs long-term funding is represented by long term debt or loans. High
gearing is lot of long-term debt. Low gearing (less risk) suggests org is relying on equity capital (valor de
Cia si se liquida). Long term debt/shareholder’s equity.

Return on investment (ROI) ratio: how effectively org uses assets to generate sales. Net income/Total
Assets. Ver Ideal Results de todos los ratios en Table 1.15

Limitations to Ratio Analysis: data is historic and may not reflect recent changes, current rates of
inflation are not considered, do not show reasons for trends, economic situation of an industry may not
be taken into account, are purely numerical and don’t reflect unethical behaviour, accountancy methods
may vary, one ratio may be good and the other bad difficults professional’s decision.

Typical Award Criteria (Price, TCO, Technical Merit, Added Value, System and Resources)

1. Price: involves checking exchange rate, batch quantities quoted, carriage, taxes, payment terms,
pricing mechanism (fixed cost, cost plus).

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2. TCO: Total Cost of Acquisition TCA (price of product, delivery, packaging, Insurance, installation) +
Tooling + Insurance + operation + maintenance + training + storage + disposal

3.Technical Merit: supplier should demonstrate good fit w/ buying organization, that is same technical
level for e.g.to receive e-purchase orders

4. Added Value Solutions: can be, innovation, on-time and in-full, strong supplier relationships,
sustainability, good ethics, CSR, shorter lead times, improve quality while maintain price, support and
training, good reputation. None of these costs additional money to buying org but generate value.

5. Systems and resources: suppliers have the technical capabilities to carry contract and computer
systems can easily integrate w/buying organization

Balancing Commercial and Technical Award Criteria: a weighted Evaluation Matrix is used to give more
weigh (importance) to certain elements in quote to allow fair eval to all suppliers. Technical Criteria:
includes Specifications, Delivery, Quality. Commercial Criteria: concerned with organizational fit and
includes Cultural Fit, Ethical Standards, Sustainability

Best value offer offers fair TCA w/added values, low TCO, high tech merit and high availability
resources.

CHAPTER 2

(2.1) Sources of Information on Market Data

Understanding value and importance of suppliers to an org helps determine style of management and
relationship required

Pareto Principal: theory 80% of total spend is distributed in 20% of suppliers

Pareto Curve/ABC analysis: A suppliers responsible for highest amount of spend (strategic),
B collectively responsible for a smaller % (closer tactical) and C are the majority of suppliers responsible
for smallest spend (transactional)(fig 2.1)

Supply and demand significantly affect prices that are displayed in indices: Stock Markets, Gross
domestic Product (GDP), Producer Price Index (PPI), Consumer Price Index (CPI), Commodity Indices,
Small Business Lending Index (SBLI), CIPS Purchasing Manager’s Index (table 2.2)

Through reviewing indices and media reports buyers understand their position within negotiation and
determine who holds grater bargaining power.

Primary Data: collected from the relevant source directly by the org who’ll use it e.g., direct
communication w/supplier, networking, trade fairs, Specially commissioned market research (focus
groups, questionaries etc.). Gets you info of availability, pricing, trends & forecasts, contact details,
company strategy, personal opinions. Is very specific. Can be distorted for example by researcher bias.

Secondary Data: information from published research or indices gather by another source, e.g.
economic indices, supplier websites, financial journals, published surveys, orgs promoting trade. Easier
and quicker to access but might not be entirely relevant. Can be distorted by going through many
channels before reaching the procurement professional. Can be used to validate primary data or
challenge it.

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Commodity Pricing: average price charged for a product. They trade on stock exchange in 4 categories
(energy, agricultural, metals, livestock). Can be affected by: supply/demand, Currency fluctuation,
political situation, conflict between countries, force majoure (earthquake, hurricane..), severe weather
condition affecting agriculture, prices of competitors, prices of substitutes, speculation. Hedge: a form
of risk management in investing used to reduce potential losses. Prices forecasts are based on historical
data, supply/demand, economy and global events). They are used in future market exchange e.g. LME,
NASDAQ, CME, ICE)

Analyzing Potential Sales: working closely w/internal teams, like marketing and sales and looking at
trends and checking for any cyclical patterns. Can use: Porter’s Five Forces, Supply/Demand, Historical
Sales (found in ERP), Trends, Expert opinions (consultants)

Pure Competition: plenty of competition in a marketplace

Imperfect Competition (monopoly): one supplier has complete control

By ensuring a supplier is financially stable professional can be more confident that: prices are fair and
favorable, guaranteed continuity of supply, risk is minimized. For potential suppliers these checks should
be done before award, but should be aware if mid-contract there are signs on instability like, reduced
levels of quality/performance, high staff churn (rotación staff), change of bank, rumors, request
payment before agreed due date.

Financial Statements (Financial Reports): are audited by professional accountancy bodies or

Income Statement/profit and loss account: shows trading performance in revenue, profit, expenses and
losses over a period of time (usually 12 months)

Balance Sheet: shows equity, assets, and liabilities at a particular point in time (usually at year end date)

Cash Flow Statements: generation and utilization of cash during the accounting period in question.

Credit Rating agencies: assess financial stability of org using data provided by banks and other financial
institutions, lenders, creditors, public info., financial reports, court judgments for debt. They generate a
score that reflects level of risk of engaging w/org.

Credit Scores are made up of percentages created from different elements (weighted scores). These
elements are Payment History, Amounts owed, Length of Credit History, New Credit, Credit Mix. Low
score=high risk/ High score=low risk. With cybercrime, lately credit scores check level of cybersecurity.

A supplier may get low score because they have recently set up as an org, may have no loan, may have
no high value assets. In these cases, procurement nay still wish to engage but reducing risk like paying
faster to help supplier w/cash flow, may accept deliveries in smaller quantities but more regularly, to
help supplier develop and ensure capacity is not exceeded. Alternatively, procurement may consider
dual or multiple sourcing to ensure continuity of supply until trust has been gained.

Credit ratings should not be used in isolation.

Processes for obtaining bids and quotations

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RFQs are less formal than ITT, used for less complex requirements than ITT, are less detailed than ITT
and are used for low to medium value contract while ITT for medium to high. RFQ’s aware of exact
needs, ITTs are opened to suggestions on how to carry out the contract in the best way for buying org.

(2.2) Key Processes

Advertising requirements is likely to increase the # of suppliers ensuring more competition and BBM,
however generates more work and so more resources are required. Way used by org depends on: value
of contract, strategic importance, urgency, resources available. Usually published in professional
magazines, business journals, newspapers, supplier websites, specialist tender portals. Public sector
uses these but also other like a centralized government-sponsored procurement portal or database. In
UK they have Contracts Finder. Private sector advertise less frequently, public are required to by
regulations. Advertisement should include: Awarding Company, Overview of awarding company, project
description, Experience/qualifications/accreditations, Deadline and Contact for queries.

RFI: collects info from potential supplier to evaluate suitability to work with. Helps buyer create a
strategy on how to carry out the procurement (figure 2.5) Can be sent as letter, email, simply asking or
formal PQQ which is a form of RFI. Typically gather info on financial position, capabilities, capacity,
mission & vision and ethical and sustainability policies. Help buyer generate data like, # of capable
suppliers, amount of competition, lead time, market trends, expected change in marketplace. Don’t
need to be used before RFQ.

Request for Quotation: can be issued as first step but good to have suppliers pre-qualified. Can contain,
specs, tech drawings, samples, quantities, delivery requirements, length of contract, terms and
conditions, details of how quotes will be evaluated. RFQ attempts to assess which supplier can achieve
the Five Rights (R. quantity, R. quality, R. time, R. place, R. price). Purpose is align corporate strategy,
ensure fair/transparent process, allow opportunity for many to bid, to evaluate market and get BBM.
Benchmarking can be carried out by comparing quotes received. To conduct regular benchmarking and
being open about it can aware long-term suppliers to remain competitive. Moving suppliers periodically
if acceptable in org strategy, can promote innovation.

Invitations to Tender: used for higher value and complexity, usually for IT Contracts, HR, Construction,
Cleaning, Maintenance, Catering, Office supplies (figure 2.7 Tender process). There are Restricted,
Open, Negotiated, according to: expectations of amount of interest (low=open) Stringent Selection
Requirements (yes=restricted), Exact knowledge of how wishes to achieve delivery of contract (yes=
open/restricted, no= negotiated). Since it’s a complex process might use cross-functional team to create
and evaluate documentation. May involve external stakeholders, like panel of consumers to test & rate.

Formalized Arrangements for tendering: orgs should have them to ensure it’s carried in ethical,
transparent, and responsible way. For exp. (Table 2.11): 1.Preparation 2.Approach 3.Timescales
4.Advertising 5.Collated Documentation 6.Consistency 7.Submission 8.Analysis 9.Decision 10.Verification
11.Negotiation (post-tender negotiation) 12.Contract Negotiation 13.Contract Award 14.Notification
15.Feedback 16.Debrief (internally to determine if improvements can be made).

MEAT: Most Economically Advantageous Tender. To arrive to it may use spreadsheets to compare data
or weight scored system. According to authority procurement professional has might have to justify

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decision to a higher level and may be through face-to-face conversation, e-mail, detailed report or
business case (introduction, process undertaken, options, benefits, costs, risks, recommendation)

Assessment of Suppliers’ Proposals: usually declared to bidders at the start, must consider, value,
positioning (strategic, routine, leverage), existing supplier relationships, econ. scales, risk of moving
supplier. Prioritize assessing urgent and important proposal ahead of low value ones (fig. 2.10).
Assessment criteria typically includes price, TCO, TCA, supplier compatibility, environmental/sustainable
practices, ethical conduct, method of contract delivery.

Weighted Points: keep decision transparent, total equals 100, the weight of each criteria reflects its
importance in the decision-making process. Example figure 2.11

Profit and loss account or Income Statement: summarizes revenues (income), costs and expenses in
financial period. When reviewing whether there is generation of profit.

Gross Profit= total revenue-cost of sales/ Net Profit = gross profit-operating expenses (fig. 2.12)

Balance Sheet: shows assets, liabilities, and shareholders equity in a particular point in time.

Total amount of Assets- amount of liabilities= shareholder’s equity (fig 2.13)

Cash Flow Statement: logs cash coming in an out of org from 3 activities, Operation, Investing,
Financing. Used to determine enough cash to pay expenses and asses long-term strength of org.

Another way to evaluate is ratios which show how 1. profitable a supplier is, how 2. liquid (having
enough money to pay short to medium liabilities/debts) and geared (proportion of org’s funding
covered by long term debt) and 3. level of investment committed to.

Profitability ratios include gross profit margin, operating profit, and net profit (table 2.17) the higher the
percentage, the stronger the organization.

Liquidity ratios include Current Ratio (good= >1 assets higher than liabilities) and Quick Ratio (good= <1
liabilities lower than current assets minus stock) (table 2.18)

Gearing ratio if it’s high geared it has high level of long-term debts against capital items= high risk

Investment: a measure of the attractiveness of an org to a potential investor which may consider the
Dividend per share ratio: ordinary dividend for the year/number of ordinary shares in issue

Limitation of ratio analysis: figures are historic, inflation/interest rates/exchange rates, operational
changes and different variation of ratios used.

Added Value should also be considered in analysis. It is separated of financial analysis and covers: good
quality, short lead time, CSR, environmental responsibility, sustainability, strong communication,
positive relationship management, good reputation, positive brand awareness.

E-requisitioning: sending and approving requi via electronic method, it’s faster, fully traceable. Linked to
it are e-purchase orders some org interlink them in MRP System (material requirement planning)

E-catalogues: feature both on intranets and internet. Accessible one click, gives various perspectives,
live info (inventory, new additions), more details

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E-auctions: the standard e-auction is supplier offers and customers bid. Bids visible, bidder not visible
(eBay), the reverse auction is where buyer states requirements and suppliers respond submitting their
quotes, bids are visible but bidding reduces as time goes on. (adv/dis table 2.23)

E-tendering: same process as standard tendering but done electronically with benefits like, efficiency,
consistency, environmentally friendly, screening of bids that don’t conform to criteria, storage space,
reduces risk of delay in turning in, assurance of reception, auditing, consistency of process, transparency

CHAPTER 3

(3.1) Key Regulations that orgs must follow, affect public, private and non-profit (table 3.2)

1.Data protection,2.Ethical Practice, 3.Health, safety and environment and worker rights, 4.Marketplace
Competition (ensure fairness, promote competition), 5.Product Safety Standards (CE=Conformité
Européene, BSI=British Standards Institution-kite mark)

Public Sector Sourcing: depends on gov. funding, tight budget, may be audited, public scrutiny,
regulations in table 3.2 plus may have additional of country. In UK Freedom Information Act and UK
Public Contract Regulations 2015 (stages buyer must follow, tender format, advertise, eligible to attend
and info given to suppliers before the tender, timescales and contract award criteria). In EU and EEA the
2014 Procurement Directives.

Open Procedure: for week-specified requirements w/no pre-qualification

Restricted Procedure: interest is high, buyer wants to assess technical capability and financial
assessments, requirements clearly defined no negotiation permitted.

Competitive Procedure w/negotiation: can join by invitation only, buyers let know there might negotiate

Competitive Dialogue: same as restricted but allows buyer to speak to suppliers after selection but
before evaluating bids, requirements are discussed during this dialogue phase to give clarity to buyer on
what’s needed and then final specifications are issued and final bids submitted and evaluated.

Innovation Partnership: buyer may be looking for product that has no capability to produce or doesn’t
exist so partners w/supplier w/expertise and capability. May do w/more than one supplier

Procurement Stages in UK: 1.Specification Stage (describe requirements, define performance and
conformance requirements, specify production methods is apply an, avoid OEM, 2.Selection Stage
(review reputation, exclude unsuitable suppliers, then review financial status and technical capability)
3.Award Stage (award to MEAT, beware of low tenders, they should be analyzed, discard submissions
from tenderers found to be in breach of international social or environmental laws)

Timescales in public sector may be defined to allow tenderers fair and reasonable amount of time to
prepare their bids like in the UK Public Contract Regulations 2015 (table 3.4)

Private Sector Sourcing: Primary sector (raw), Secondary (manufacture), Tertiary (retailers or service
providers), Quaternary (research and intellectual advancement orgs. Must ensure keeping costumers
and stakeholders satisfied to enable funding and profit. Can be more flexible, having opportunity to
prioritize within the 5 rights like quality, delivery place and time, because org reputation rests on quality,
therefore purchasing from a more expensive supplier may be beneficial long-term. May chose not to

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carry competitive bidding and can go directly to one supplier, still procurement professional must follow
processes specified by the org throughout the sourcing process.

Non-Profit Sector Sourcing: look not to profit but to support causes based on their social and ethical
values, mostly made up of NGOs. Funded mostly by donations and fundraising activities, so must make
effort to save money. Have sourcing flexibility aiming to be efficient and not waste money, but still
bounded by laws and regulations of nation where they operate, like Australian Charities and Not for
Profit Comission, Charity Commission for England and Wales and IRS in the USA.

Trade Blocs: formed by number of nations with the countries they represent receiving benefits for
internal trading, like lesser restrictions on tariffs (rules regulating type of goods, quota and import duties
from specific countries) and duties such as import duties. May be Common Market form, where
member nations may choose to waive tariffs or duties between themselves (Caribbean Community
CARICOM) or Free Trade areas, where member nations waive tariffs or duties between themselves
(EU). (Adv/Dis table 3.6)

Regulations of International Trade: regulated since 1995 by WTO (World Trade Org) which provides
forum for negotiation trade agreements, mediates in disputes. Dispute Settlement Understanding
(DSU) includes rules about procedures for: review panels and functions, conciliation and mediations (not
legally binding), appellate reviews, time frames for decisions, arbitration.

Role of customs organizations is to stop prohibited items to entre country illegally, preventing product
to reach end user protecting of potential harm and/or damage to supplier’s reputation. Also, role is to
control quotas given in tariffs are not exceeded.

Documents are needed to enable goods to pass from point of origin to destination. In EU are T1 Doc (for
transit goods through EU, no duties), Import/export license (might be required for a particular product),
Single Administrative Document (only for good entering or leaving EU), New Computerized Transit
System (to electronically track products transported within EU), Custom Declaration Service (in UK to
submit electronically import/export requests.

If origin of goods is uncertain and buyer wants legal certainty, may apply for a Binding Origin
Information (BOI) decision provided by a EU member state, however even if BOI is in place supplier is
still expected to provide some proof of origin of goods. Within EU and EEA, 2 types of origin 1. Non-
preferential Origin (subject to tariff quotas and other customs regulations 2. Preferential Origin (entry
allowed w/no duty charges or limitation through tariffs).

Docs required for imports/exports to facilitate flow are PO (include Incoterms), BL, Insurance
Certificate, Certificate of Origin, Carnet (Admission Temporaire Carnet ATC)

Import Duty: tax to be paid before goods permitted to enter country, can de found in tariffs. Tariffs
defined by country for imports and apply to specific commodities from named countries. Tariffs and
duties are enforced for a number of reasons (fig 3.4): 1.Protection end user’s health, 2.Protection of
infant/starting industries, 3.Monitor goods from countries that in the past had been problematic,
4.National defense products or sub-components

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Free movement within EU originate within the European Single Market established following the Single
European Act in 1986, Then Treaty on the Functioning of European Union (art 30), where each member
state is required to ensure its legislation and customs procedures enable free movement of goods.

Integrated Tariff of the UK, Volume 1: duty relief, quotas and relief duty, Volume 2: duty rates amd
trade commodity codes, Volume 3: freight procedure guidance. These are applied bu HM Revenue and
Customs Agency which expects sender to provide Ad Valorum estimate (value goods + insurance, freight
and other costs) to calculate duty owed, VAT and trade statistics. Duty relief examples in UK are
Customs Warehousing Relief: where goods are stored at a defined location if they are later exported
outside EU, no duty or tax, Inward Processing Relief: where goods enter from outside EU and later
exported, Outward Processing R: temporally exported like for repairs, End-use R: goods that can only be
used within a set period like fresh products.

Icoterms: published by International Chamber of Commerce (ICC), also lately used domestically. Are
used to describe point where a deliverable is no longer responsibility of the supplier transferring the risk
to buyer. Point where considered delivered, who pays insurance and who arranges this, who makes duty
and tariff arrangements and passage through customs. (see table 3.7 for the 11 of the 2010 edition)

Open Account: supplier delivers goods before receiving payment

Term/time Draft: guarantee of payment from buyer’s bank ensuring supplier retains title until buyer
receives it and after a small delay where buyer inspects the goods, then the supplier will be paid.

Sight Draft: same as term/time but buyer must pay as soon as received w/no delay

Letter of Credit: guarantee of payment from buyer’s bank stating that will be paid after it meets
conditions in letter. Favorable for buyer as it does not pay bank until conditions are met

Cash in Advance: buyer pays supplier before goods received

Value of currency: determined by supply/demand on Foreign Exchange Market (Forex), the stronger
currency is the one who’s conversion gets more than one e.g. 1 Euro= 15.37 ZAR. Ideal situation for
buyer is to have a strong currency against the supplier’s currency. A way to guard against price
fluctuations is to specify that currency for tenders is the national currency of buyer.

Currency hedging: to purchase foreign currency ahead of payment to avoid loss from market
fluctuations through different techniques and products offered by banks like Forward Contract to fix an
exchange rate for a future sale or purchase of currency. They have a fee.

Access to currency regulations: not all currencies are tradable (non-convertible). Most common are
USD, EUR, JOY, GBP. Exotic are traded less so availability is more restricted like COP.

Ability to make and receive payments: professionals should check they’ll be able to access any currency
and can make payments on time.

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 CHAPTER 4

(4.1) Impact of Corruption

General Conditions, there is general global movement towards “tightening-up” in area of payment as
anti-money laundry and countering terrorism measures. There are numerous of best practices and
policies like the Int. Monetary Fund, Crime Act in UK and Money Laundry Control Act in US.

Corruption Perception Index w/scale 0-100, being 0 the highly corrupt

Cultural relativism: one of biggest issues for corruption as some individuals may try to defend a
corruption act based that it is normal in their culture. Like Facilitation Payments: bribe for something to
take place or speed up a process.

Anti-Corruption Legislation: in USA, the Foreign Corrupt Practices Act, considers not amounts but intent
and distinguishes “gaft” as a specific type when politicians misuse their authority in their benefit.
Facilitation payments are not condemned if legal in the host country. In UK, the Bribery Act

Bribery: could be money, political favor, company shares or any other things as long as they are of value
to the recipient. Equally the outcome takes the same for, something of the bribing party wants like
award of contract. OECD indicates most affected industries are defense, property development, mining
and medical.

Gifting and hospitality: in some cultures, is normal and not always intend something back. To protect
procurement team and other employees’ orgs may choose to adopt a policy for when it’s acceptable,
what types are or not acceptable, procedure according to value, use of gifts once received.

Fraud: someone unlawfully obtaining funds or resources for their own benefit. It can be from external
stakeholders or workplace fraud (small-scale difficult to detect). Embezzlement is misuse of funds or
resources they have authority overusing them in a way it benefits themselves. Individuals commit fraud
because of a Perceived Pressure, Perceived Opportunity, or Rationalization

Advance fee fraud: victim is asked to pay upfront and gods/services never delivered.

Corporate Fraud: targets an organization

Identity Fraud: where false identity is created and used to commit fraudulent act or when another’s
person’s identity

Individual Fraud: target one specific person

Online Fraud: act of cybercrime like phishing, account takeover, money mulling, official requests that
makes victim click a link.

Where party is suspected or found guilty of fraud, its relationship w/other orgs is likely to be
permanently harmed. Buyers must not tolerate or accept fraud.

Human Rights: Universal Declaration of HR by UN in 1948, today still contains 30 articles prescribing HR
that apply to all UN members. Include: Right to Freedom, Right to have HR and for these not to be
removed (unless brake laws some may be restricted), Right to be treated equally and receive equal
protection, Right to belief and changes in belief, Right to free speech and expression

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A responsible buyer’s primary concern is the potential mistreatment of people living in country in
question which could include staff of supplier or its sub-tiers. Also, preoccupation of negative media.

CIPS Code of Conduct states Procurement prof members of CIPS should promote eradication of HR
violations, by learning about them and carrying due diligence. Following ogrs support this:

Local law enforcement organizations based in country where HR violation is believed to have occurred.

Amnesty International: global non-profit NGO dedicated to promotion of HR , Is also calling for global
requirement for corporations to : be required by law to prevent HR violations by reporting them, Held
accountable for HR violations that they commit, Provide remedy and justice to victims

Human Right Watch: global non-profit NGO, investigates cases of suspected HR abuses, also promotes
and defends HR around the world.

Equality and Human Rights Commission (UK): regulatory body dedicated to enforcing HR Act 1998and
Equity Act 2010

Australian HR Commission: org protect HR in Australia while working closely with members of the Asia
Pacific Forum of Human Rights Institutions

Modern Slavery: still in homes ad busines worldwide, number is estimated of 40.3 million (by ILO),
through threats of violence against person and the family, resulting from a perceived debt, or individuals
may be tricked with promise of better life but are captured through trafficking networks. Neat=rly 1/5 is
children. Allows business to offer for very low cost, buyer should be vigilant looking for signs of slavery.

CIPS Code of Conduct is set of values, behaviors, and actions that CIPS requires its members to have.
Benefit is having better understanding of how to carry ethical and effective business. Has five sections:
1. Enhance and protect the profession, 2. Promote eradication of unethical business practices 3.
Maintain the highest standard of integrity in all business relationships 4. Enhance the proficiency and
statue of the profession, 5. Ensure full compliance with laws and regulations.

Ethical Codes of Practice: developing them allows orgs to demonstrate its commitment to carry out
ethically and reject corrupt practices. Could take form of stand-alone or code or can be incorporated
into a Code of Conduct. Three key levels: Profession level, such as CIPS, Sector level: like International
Diamond Manufacturers Association, and Company level: org chose to publish its own code of ethics

Pre-qualification and assessment Criteria could asses ethical practices which include Social,
Environment an Economic Criteria (table 4.1)

Due Diligence: by carrying it buyer can improve understanding of the supplier’s quality, performance
and ethical make-up revealing any risks that may be present. Must be carried out by asking supplier to
provide info on template visiting supplier’s premises, desktop assessment to see if there is info online.

Common due diligence factors are, first impression of supplier, product/service quality, qualifications of
providers and background checks (adverse media, criminal conviction, corrupt practices, financial
performance)

Risk assessment: risks should de scored in terms of “likelihood” and potential impact, recorder,
reviewed and maintained in a risk register.

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The best time to assess supplier is during tender stage, Buyer can use pass/fail criteria or scored
questions as part of a pre-qualification questionnaire to assess this. Suppliers who don’t meet agreed
criteria should be eliminated. This is opportunity to include any other questions relevant to the orgs
value to make purchase more ethical, taking social and environmental considerations into account. It’s
important pass/fail criteria is set out before releasing these questions (table 4.2).

Contractual Clauses that support ethical procurement, one of the best places to state them. Supplier is
expected to conform to local laws including HR, bribery, corruption and other ethical concerns.

Sustainability KPIs: measurements of waste to send to landfill instead recycle, consumption of energy.
Buyer should ensure KPIs are not too much burden on supplier, if it’s costly or time-consuming supplier
might struggle to meet putting them at risk of losing contract

Supplier Monitoring: traditionally focused on financial stability, recently concerns are ethical
performance

Types of Process that promote a company’s commitment to Ethical and Sustainable practices:
1. Accreditations from Professional Bodies, 2. Mission statements, visions and values on company’s
website, 4. Internal processes that govern how individuals work, 5. Internal Policies that govern the way
the business works. If supplier is not able to demonstrate these attributes, buyer should treat it as risk,
as audits to buying org may find it unethical for, knowingly or not buyin, from unethical supplier.

Buying org acts as auditor to monitor supplier ethical performance. May be possible to have an impartial
person or org take the role of auditor on buyer’s org behalf. Generally, are face-to face at supplier
premises (very little or no warning), moving around independently or escorted by supplier staff who
should not intervene, use questionnaires, interviews to staff.

Auditor should make plan defining clear scope which determines, length of audit, period of time to be
reviewed, teams or functions that it will focus, extent of work or activities it will focus on, which
processes will be looked at. If audit plan is not followed there is potential for Scope Creep (focused on
elements not originally intended to), which can negatively affect outcome and other activities like time
and money wasted looking at wrong things, not understanding true root cause of identified problems,
over-burdening supplier, disruption of supplier’s operations.

When possible should be unannounced so avoid supplier fraudulently creating docs, cleaning facilities
and equipment, mandating staff to wear PPE that day when usually don’t, coaching staff on what to say.

After audit is good practice to communicate non-conformances or opportunities for improvement

It’s necessary to have formal process that allow for timely remedial and address all of root causes of
problems. Supplier is responsible for identifying root causes of the problem the buyer identified, and for
developing corrective and preventive actions.

Conflict of Interest: relationships that people have in social and professional lives have a potential to
make someone behave differently against a given situation. Can be from one business to another or
internal where family or friends work in the same company. The importance is not only if something

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corrupt happens but how it is perceived and so people not behaving corruptly can be accused of it, that
is why it’s best to openly declare it. Maybe the individuals may not recognize or perceive the conflict of
interest, then it may be up to a person’s manager or another suitable person to declare they believe it
exist but should include the individuals in any discussion.

To cover from liabilities many orgs have a conflict of interest log to serve as audit trail. Include date
conflict of interest is raised, names of the individuals, details of their roles and teams, details of their
relationship, boundaries or conditions set in case individuals are asked to work together. Logs should be
reviewed regularly to understand if conflict still exists.

Conflict of Interest between business must also be declared and understood. As part of sourcing process
buyer may ask supplier to complete a “Declaration of No Conflict of Interest”

Corporate Social Responsibility: demonstration of ethical behaviors carried out by an org which can be
closely scrutinized by external stakeholders. Can contribute to an org winning more business. Org is
accountable for these additional responsibilities. On of best ways to display strong CSR is understanding
sustainable development and the ways it applies it.

Sustainable Development: development that meets needs of population in the present without
negatively affecting the resource needs of future population. Has three pillars: Social (how affects
people, cultures, laws), Environmental (ecosystems and natural resources), Economic (how an activity
affects finances or resources of individuals, markets and national economies)

It’s important for buyer to consider what effects their purchases may have on environment or people. It
is widely recognized, in 2015 UN set 17 Sustainable Development Goals, scheduled to be met by 2030.

Triple Bottom Line: where org’s performance against social and environmental factors are important in
addition to economic performance, made up of 3 Ps: Profit, People, Planet.

Sustainability can be expressed as being the intersection of profit, people and planet.

ISO 20400-2017: sustainable development standard that specifically covers sustainable procurement.
Contributes to achieving 8 of the 17 UN goals including: provision of decent work and the driving of
economic growth, reducing inequality in the supply chain, responsible production, supporting
communities

If org requires supplier to follow a particular standard it can include in specifications. Being accredited to
a standard is beneficial as it is globally recognized, however a company may choose to develop its own
set of ethical or sustainable practices and policies to best suit its needs and vision.

Social impact of an org’s behavior can be positive or negative like, health effects, splitting communities,
attract skilled people, cultural changes. They are not always intentional. Direct: where activity is carried
with intention of imposing positive or negative impact. Negative Indirect may not be understood until
too late, so hard to plan mitigation. Can be internal to the org (employees) or external.

An org may opt to monitor ecological and social impact, this could benefit by reduce waste during
manufacture, reduction of time lost to sickness, money saved as result of any combination of these
benefits. Will require additional resources but may save money due to more carefully managing impact
on staff, suppliers, local community, and environment.

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Offset/Industrial Participation: to support nation economy, the government may impose these
requirements on foreign companies that it procures from, expressed in % to the value of procurement.
Examples of offset categories: procurement of products/services, investment in local infrastructure,
contributions to research and development through sharing knowledge, intellectual property,
investment into improving local access to education.

Participation of Disadvantage groups: important to an org’s value is use of elderly, people w/disabilities,
pregnant woman, people living in poverty, immunocompromised people.

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