The Procurement Models Handbook

Andrea Cordell, Ian Thompson

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781351239486
• Edition: 3
• Topic: Business
• Subtopic: Business General
• Index: Business

Building from the previous two successful editions, The Procurement Models Handbook is an essential resource for everyone working in the procurement profession, including those selling directly to it. The authors provide the reader with a useful guide to the business models most frequently applied in the procurement and supply chain arena.

Procurement and supply chain management are two of the highest contributors to corporate success in the modern world. This third edition is a new revised international version with additional tools that reflect the value of procurement in our globally-connected world. The authors have included over 50 well-established strategic and operational models that have a proven track record of delivering value over years of practice. Each model is presented pictorially, with explanatory commentary on its practical application to support.

These models are designed to save unnecessary cost and deliver significant benefits for their user and have been carefully selected by the authors based on their originality and usefulness for practical application in the context of procurement and the supply chain. The Procurement Models Handbook is an invaluable and enduring source of reference for practitioners and business managers, as well as an essential learning support for business and procurement students.

Section 1
Key processes

Model 1
Procurement life cycle

Figure 1.1 Procurement Life Cycle

Overview

This is one of the basic procurement models detailing the main stages of procurement activity when sourcing either goods or services, see Figure 1.1. It begins when a need is identified and ends when that need has been fulfilled and either consumed or disposed of.

The model is cyclical because once a product has been consumed and/or disposed of, a replacement is often required thus repeating the process.

Elements

The main stages of the Procurement Life Cycle are as follows:

• Stage 1 – Identify need. The life cycle is initiated with the identification of a need. The business has a requirement and a purchase is required to fulfil it.
• Stage 2 – Specification. This is the documented statement of requirements. It is then used by suppliers to assist with technical and pricing decisions.
• Stage 3 – Make or buy? The ‘make’ decision involves the organisation proceeding to fulfil the need internally, whereas the ‘buy’ decision requires the organisation to purchase from a third party.
• Stage 4 – Identify suppliers. This stage involves searching and analysing the supply market; it is about identifying suitable and appropriate resources.
• Stage 5 – Source selection. This involves identifying the preferred supplier to supply the goods or services required, possibly through a tendering or RFx exercise.
• Stage 6 – Negotiate contract. Once a supplier has been selected there may need to be several rounds of negotiation or clarification in order to agree the final commercial and contractual details.
• Stage 7 – Receipt and payment. Payment for goods and services usually occurs after receipt, although this is not always the case. This is often referred to as ‘purchasing’ or even ‘purchase-to-pay’ (P2P).
• Stage 8 – Manage contract. The contract needs to be managed in order to ensure performance by the supplier. This stage is also sometimes referred to as supply management.
• Stage 9 – Consumption. The bought-in goods and serviced are utilised during the life of the contract and may need replenishment, maintenance or some form of service management.
• Stage 10 – Decommission and disposal. The end of the life cycle involves the disposal of the product. This is important in view of the drivers for sustainability and whole life costs.

So what?

The Cycle is often used from a theoretical rather than a practical perspective to explain and demonstrate a procurement function’s flow of activities. Its form will vary depending on the organisation and its structure.

The model is sometimes referred to as the ‘Purchasing Cycle’ or the ‘Purchase Process’ – but these are inadequate descriptions, as the Procurement Life Cycle describes the end-to-end stages in the life of both the procurement activity and the purchase itself.

Procurement application

• Identifies the key stages in the procurement process
• Supports business process re-engineering
• Aids the procurement planning process.

Limitations

This is a simple model that shows a process flow. It does not attempt to predict scenarios or indicate potential solutions. There is also some debate as to whether ‘procurement’ is the correct label for the cycle, with references to purchasing or sourcing instead.

Arguably, the Procurement Life Cycle for public sector organisations may be different from that of private sector organisations because of the requirements of public sector regulated procurement (e.g. WTO rules, EU Directives and so on). However, the Procurement Life Cycle is a generic model that can be adapted to the specific context in which it is to be applied.

Finally, this is seen as having tactical application only, as it does not recognise the more complex and strategic oriented work of the modern procurement function.

Further reading

You can read more about Procurement Life Cycle theory in:

Baily, P., Farmer, D., Crocker, B., Jessop, D. and Jones, D. (2015). Procurement Principles and Management. 11th edition. Harlow: Pearson.

Associated models

• Contract Management Cycle (Model 2)
• Category Management Process (Model 3)
• Outsourcing Decision Matrix (Model 26)
• The Negotiation Process (Model 32).

Model 2
Contract management cycle

Figure 1.2 Contract Management Cycle

Overview

Managing contracts is one of the hardest and yet most valuable skills required for procurement and commercial practitioners. Too often procurement has been seen as the ‘knock it up and run’ profession that focuses just on sourcing suppliers and awarding contracts (and subsequently claiming big paper-based savings) only to leave the management of the contract to others in the organisation. As such, these commercial benefits and savings rarely materialise in full and value often ‘walks out of the door’ during contract delivery.

The Contract Management Cycle demonstrates the natural lifecycle progression of activities that a contract manager needs to work through when managing a contract and it applies universally across a wide range of contract types.

Elements

There are six main phases in the Contract Management Cycle, plus a number of sub-phases:

Start-up Governance Kick-off	The initial stages immediately following contract award: • Roles and responsibilities established • Contract Management Plan established • Kick-off meeting held • Pre-commencement requirements fulfilled.
Transition	This represents the mobilisation and ramp-up of activities to full delivery: • Handover completed • Mobilisation of resources • Ramp-up of demand/supply to maturity.
Measure Monitor Review	Throughout the maturity of the contract, the emphasis is upon performance delivery: • Measuring key performance criteria • Monitoring performance data • Reviewing and interpreting performance • Mitigating risks.
Drive performance improvements	Delivering the required contract performance throughout the life of the contract: • Delivering the required benefits • Compliant with requirements • Continuous improvement gains • Customer satisfaction. Within this the sub-phases of managing change and remedying failures are included.
Deliver outcomes and benefits	Realising the commercial and operational benefits [outcomes] specified within the contract: • Desired outcomes and deliverables • Commercial gains • Social, economic and environmental performance • Ratification of the contract delivery.
Close-out Exit Review	Preparing for the end of the contract: • Preparing for and managing the exit • Fulfilling termination requirements • Handover to replacement supplier(s) • Learning review for future improvements. This also include the sub-phases of planning for and executing any contract renewals beyond the initial contract term.

Being cyclical, the Contract Management Cycle suggests that these activities re-commence with a subsequent (new) contract.

So what?

The Contract Management Cycle encapsulates the full roles and responsibilities of a contract manager (or contract management team) and helps to illustrate these in a simple process diagram. Contract management has clear sequences of activity and several activities naturally flow on from one another. The model helps to map out what the contract manager needs to be focusing on and clearly demonstrates the dynamic nature of contract management.

The next logical progression when using the model is to map roles and responsibilities against key staff and stakeholders, possibly in the form of a RACI matrix so that the organisation can work effectively to ensure that the promised contract deliverables are received effectively.

Procurement application

• Defines key activities for contract managers
• Helps to manage contract deliverables and performance
• Mitigates contractual and commercial risk.

Limitations

Although the Contract Management Cycles offers a systematic and sequential guide to the core activities of contract management, it does not tell you how to manage contracts. The Cycle is a useful listing of activities and helpful for stakeholders to discuss and agree on who does what, however it does not provide any guidance on how better performance from contracts can be delivered.

Contract management is a broad set of commercial skills brought together in this model. However, to deliver tangible and effective results from contract management, you will need to delve deeper into this subject and explore each of these commercial activities individually.

Further reading

The International Association for Contract & Commercial Management (IACCM) is probably the world’s leading professional body for contract management and offers a series of professional qualifications and training to support contract managers. You can read more about the cycle of contract management activities in:

Cummins, T. et al. (2011). Contract & Commercial Management: The Operational Guide. Zaltbommel, The Netherlands: Van Haren Publishing.

Emery, B. (2013). Fundamentals of Contract & Commercial Management. Zaltbommel, The Netherlands: Van Haren Publishing.

Associated models

• Procurement Life Cycle (Model 1)
• Plan–Do–Check–Act Cycle (Model 5)
• Risk Assessment (...