Chapter 4

Needs Identification and Specifications

 Agenda
1. Needs Identification & Needs Criteria
2. The “7 Rights”
3. Methods of description
 1. Needs identification & Needs Criteria
- WHY/WHAT/WHEN/WHERE/WHOM - HOW
- What is your role & responsibility?
- What is your function goal & objective?
- What is your organization vision & mission?
 Understanding your customers:
Who are they?
How important are they?

What is the nature of the

customer relationship?

What are the needs &

expectations of each customer
group?

ITC M12:U2:2.3-2
 Information?

INTERNET

ITC
 Users
•Internal ... & its
•External
customers
purchasing Top
& supply...
P&S
management
manager

Staff / Suppliers
teams

Service
providers

Customers

•P&S interacts with

customers
•Only involve the most
important suppliers & Other departments
service providers
Making sense of the information

Gather the information

Check the reliability
Analyse & interpret
Organize what you have collected
 Analysing the information...
Overall economic
An industry survey
information obtained
published by the
from the World Bank
Financial Times…
and internet etc..…

Prices of inputs quoted by

suppliers, and price
references found in
a specialised journal…
Paper-based
study on the
substitutability of Export statistics of
alternative products, various countries,
provided by a technical obtained through
research institute…. website…
 Needs Identification
 Repetitive or non-repetitive requirements:
 Repetitive requirements: avoiding the total acquisition process used to select the
supplier + long term contract→ price↓ ><short term contract → switch suppliers
 Non-repetitive requirements: depending on the category and the need criteria →
process of acquisition.
 Commercial equivalents: to ensure that value opportunities are not
overlooked
 Early supply and supplier involvement: help assure that what is specified
is also procurable and represents good value.

12

9 3

6
Needs Criteria in the Value Proposition
 Strategic criteria: is this a strategic requirement or not?
 The financial implication or impact of the requirement →
80/20 rule
 Others: risk reduction, access to new technology or new
markets, assurance of supply in tight markets, revenue
enhancement, potential competitive benefits, corporate
image or reputation improvement …..
 Traditional criteria: Quality, Quantity, Delivery, Price,
Services, Others.
 Additional current criteria: Financial, Risk, Environmental,
Innovation, Regulatory compliance and transparency, Social
and political factors.
 The Supply Positioning Model:
H

M
Impact/ Bottleneck Critical
supply
opportunity/
risk rating Routine Leverage
L

N
80% of items = 20% of value 20% of items = 80% of value

$ Expenditure
ITC M7:U2:2.2-5
 The Supply Positioning Model
H Bottleneck Items Critical Items

Ensure
Develop supply
availability of
chain alliances
supply
M
Impact/
supply
opportunity/ Routine Items Leverage Items
risk
L Manage Reduce supply
efficiently or variety & use your
outsource company’s leverage

N 80% of items = 20% of value 20% of items = 80% of value

Expenditure
 Needs Categories
1. Resale: comprise retailers, wholesalers, distributors, agents,
brooker etc..
2. Raw Material & Work In-Process (WIP)
3. Part, Components, Packaging
4. Maintenance, Repair & Operation (MRO) Supplies & Small
Value Purchase
5. Capital : Facilities, equipment, IT system etc...
6. Services HR Services, Finance services, Logistics services
Legal Services, Marketing Services etc.
7. Others
 Purchase areas
Each area will have a different degree of priority
to your company

This will depend on value, impact, opportunities

Raw materials & costs

Components Office equipment &

supplies Services
Energy

Packaging materials
Diesel
Maintenance, repair &
operation (MRO) goods &
services Plant construction &
equipment
ITC M12:U2:2.3-11
 Expected Outcomes
There are 4 fundamental goals of purchasing:
1. Maximise customer satisfaction
2. Maximise supply opportunities
3. Minimise supply risk
4. Minimise supply cost

3 levels of outcomes:
Corporate level

Functional level

Outcomes by “specific elements” such as by

customer, by purchase area, by supplier, etc.
 Corporate goals: Customer satisfaction
Profitability Total quality management
Sales revenue Ethical conduct
Market share Contribution to social development
Market position Contribution to environmental protection
Corporate strategy:
the key dimensions

1. Which products/ 3. What conditions

services? to offer?

ntract
Co

2. Which markets?

4. How to enter &

develop the
markets?

5. How to operate
cost-effectively?
ITC
 Targets areas:
Targets related to outcomes
 targets for corporate level outcomes
 targets for function level outcomes
 Targets for specific function elements

Links in the company's supply chain

Logis-tics
P&S

ITC M12:U3:3.3-11
 Needs Identification & Specifications

Corporate Objectives

Objectives of the
Best & Worst
Purchasing Function
Acceptable
Targets
Objectives
• Goals to be
achieved
• Problems to
be resolved Options

Variables

Understanding the organization OGSM linkage to specific needs -→

specifications
Specification constitutes the best known methods the owner select.
 2. The “7 Rights”
1. The right quality of product or service
2. The right quantity (s)
3. At the right time(s)
4. At the right place(s)
5. With the right support service
6. At the right price or total cost of acquisition / ownership
7. From the right supply chain (i.e. supplier, logistics
provider, etc.).
The right quality of product or service
Reflects expectations on the nature & features of the product / service, e.g.:
✓ Design, size & colour
✓ Capacity
✓ Functionality & ease of use
✓ Performance & reliability
✓ Robustness & durability
✓ Flexibility
✓ Conditions of use
✓ Safety requirements
✓ Warranties
✓ Use of energy, water, materials
✓ Recyclability & wastage
✓ Packaging & labelling
Determining the right quantities, times & places
❑Inventory: The way that the accumulation of these
materials is optimised so that the business can satisfy
its customers’ demands for the delivery of a required
quantity and quality of products at the right time and
at the minimum cost to the business
❑Push strategies: entail working to long-term forecast
and estimating the number of products being produced
✓ Demand forecasts
✓ Established inventory reorder levels or periods
✓ Methods used for setting order quantities
✓ MRP or ERP system

❑Pull strategies: mean that there is no production until

the customer has signalled demand by ordering a
product or service (JIT)
 PUSH & PULL

? ? ? ? ?
Determining the cross-over point in the supply
chain from PUSH to PULL – factors:
Demand change & forecast reliability

Required product configurations & variability

Required customer response time (balancing

capacity with inventory)
Where in the supply chain and how much
inventory to keep?
? ? ? ? ?

Materials Component Assembler Storage Retailer

suppliers manufacturer

•Cost
•Flexibility
•Service level
•Response time
Determining the right quantities, times & places (cont.)
❑ Purchase orders must take account of supply lead times
❑ Consider the difference between order quantity & delivery
quantity
❑ SMEs may increase order sizes to attract suppliers by:
✓ Consolidating into larger, less-frequent orders
✓ Internal standardisation of specifications
✓ Grouping purchases with other SMEs.
❑ Specify where the goods or services are to be delivered,
and how these should be delivered
The right support service – e.g.:
▪ Complying with governmental & customs regulations, etc.
▪ Financing support, or special payment terms
▪ Consignment stocks
▪ Documentation & information Installation & commissioning of
equipment
▪ Training, coaching & technical support
▪ Maintenance & spare parts
▪ Emergency repair services & response times
▪ IT support
▪ Recycling & / or safe disposal
The right price or TCA / TCO

❑ “Right price” rather than “lowest price”

❑ Total cost of acquisition (TCA): price plus the full cost of getting the
goods or services to the point of use
❑ Total cost of ownership (TCO) (also: life-cycle cost , LCC): a
financial estimate intended to help buyer/owner to determine the
direct & indirect cost of a product or system
such as:
✓ Equipment & installation services
✓ Materials & other production inputs
✓ Durable consumer goods
✓Etc..
❑ Specifying the price or TCA / TCO will be used as an internal
benchmark against which suppliers’ offers will be assessed
 Total cost of ownership
Price vs. total cost of ownership

Post-transaction
Transaction costs
Pre-transaction costs
• Operating costs
costs • Price (energy, labour &
• Administrative cost of consumables)
• Identification of needs
purchasing • Stockholding costs
• Investigation of supply
• Transport / delivery • Maintenance & repairs
sources
• Tariffs, duties & taxes • Spare parts
• Qualification and
• Invoicing & payment • Downtime / lost output
registration of suppliers
• Inspection & testing • Wastage in production
• Communications between
• Returns • Defective outputs
buyer & supplier
• Follow-up correction • Lost customer
• Training of buyer
• Installation & goodwill & reputation
and/or supplier
commissioning • De-commissioning
• Late delivery and disposal
The right supply chain
❑ Without the right supply chain the other Rights may not
be attained

❑ This means determining which capabilities &

motivations to seek in upstream suppliers & supply
chains, to secure the required goods & services over
time

❑ Particularly important for SMEs due to deeper reliance

& less leverage on suppliers

❑ SMEs are often constrained to a restricted range of

supply chains – e.g. buying only from traders & agents,
not producers

5.2-5
 3. Methods of Description
 By brand:
▪ Brands & trade names
▪ Supplier & industry codes

 By specifications:
 Physical or chemical characteristics.
 Material and method of manufacture.
 Performance.
 By engineering drawing.
 By miscellaneous methods:
 Market grades.
 Sample – what you see is what you get..
 By a combination of two or more methods.
 Government, Legal, Environmental Requirements etc..
 Ways to specify product / service specifications
⧫ Technical Specifications, e.g.: ⧫ Composition Specifications

▪ Physical characteristics ⧫ Functional & performance

(dimensions, etc.) specifications
▪ Strength, resistance, etc. ⧫ Testing & inspection requirements
▪ Design details
⧫ Service specifications
▪ Tolerances
▪ Materials used ⧫ Standards specification

▪ Production methods ⧫ Standardisation & Simplification

▪ Maintenance requirements ⧫ Value analysis & value
▪ Operational requirements engineering (VA / VE)
 In Summary
 Needs definition and translation of needs:
▪ Level 1: strategic vs non-strategic
▪ Level 2: quality, quantity, delivery, price, services …
▪ Level 3: Additional financial considerations beyond price, risk,
environment, innovation etc…

 Needs Categories: Resale, Raw & WIP, Parts, MRO, Capital

& Services and Others
 Supply Professional to become fully acquainted with specific
market and suppliers
 Early supply and supplier involvement in the acquisition
process is essential for effective value improvement
 Standardization and Simplification are used to improve value
by reducing the variety of requirements
RFQ vs RFP
 RFQ vs RFP
RFQ: focus on price & specifications:
 Requirements are clear & well defined
 Mostly for standardized products/services
 Suppliers provide pricing, delivery terms & conditions
 Decision is often based on the lowest bid

RFP: focus on solutions & value

 Requirements are complex and need creative input
 Evaluate expertise, methodology, overall approach.
 Suppliers provide detailed proposal, strategy & pricing
 Decision is often based multiple factor, not just cost
BACK UP
 Homeworks
Reading the text book the below cases:
 Case 6-1: Moren Corporation (A)
 Case 6-2: Moren Corporation (B)
 Case 6-3: Carson Manor Study

Applying the learnings in your semester project:

 Identify the needs & project scopes of work
 Define project specifications
 Request For Proposal (RFP)
 Sourcing decision
 Criteria of supplier selection