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L4M4 CIPS > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

How many types of Sourcing Strategy is there and what are they?

A
  1. Tactical and Strategic
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2
Q

What are the characteristics of Tactical/ Operational sourcing?

A

Low level decision making

High profit, low risk items

Short term projects

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3
Q

What are the characteristics of Strategic sourcing?

A

Top level decision making

High profit, high risk items

Long term projects

Collaborative relationships

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4
Q

Remember, sourcing is all about seeking best value for money

A
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5
Q

What is the definition of New Buy?

A

All-new purchase of something to the company

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6
Q

What is the definition of Modified Rebuy?

A

A previous purchased something sent off for modification

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7
Q

What is the definition of Straight Rebuy?

A

Exactly the same purchase of a product already sourced. Reorder basically.

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8
Q

What is the definition of Outsourcing?

A

Contracting a supplier to supply a service which was once handled in house.

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9
Q

What are the advantages of Outsourcing?

A

Reduce overheads/ fixed costs

Reduced need to invest in new technology when they are not experts in the field. The wrong allocation of investment could be made. Outsourced suppliers will have a greater knowledge of this leading to value for money

No need to recruit additional staff or invest in continuous training

Benefit from an outsource supplier industry knowledge

Improved focus on core activities. Organisation can focus on activities which is best suited too to create value

Reduce risks in managing multiple services

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10
Q

Which activities should not be outsourced and why?

A

Core activities. those which makes the company competitive and need control of.

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11
Q

Which model should be used for competition/ rivalry analysis?

A

Porters 5 forces.

Make sure you can draw this!

Rivalry between competitors
Barriers to entry 
Bargaining powers of buyer
Bargaining power of supplier
Threat of substitutes

Remember, it is also used to determine if item should be outsourced.

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12
Q

What are the advantages of Make decision?

A

Control over processes

Improved quality control

Workforce remains stable

No suitable ‘buy’ suppliers

Reduced risk

Easier to amend, design and volume

Might be cheaper than buy

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13
Q

What are the advantages of Buy decision?

A

Specialised knowledge made available

Technological advancements – cost effective through economies of scale

Small volumes are not cost effective to ‘make’

Might be cheaper to buy in than make

No capacity or knowledge in house

Less inventory

Reduced overheads

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14
Q

What are the advantages of Buy decision?

A

Specialised knowledge made available

Technological advancements – cost effective through economies of scale

Small volumes are not cost effective to ‘make’

Cheaper to buy in that make

No capacity or knowledge in house

Less inventory

Reduced overheads

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15
Q

Which model should be used to map profit and risk of a product/ service to an organisation?

A

Kraljic Matrix

Make sure you can draw this!

A review of profit risk and supply risk

From left to right:

Leverage Items
Strategic items
Non-critical Items
Bottle Neck Items

Remember, it is also used to determine if item should be outsourced.

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16
Q

What is the link between Kraljic matrix and sourcing style?

A

Leverage items - Tactical (transactional)
Strategic items - Strategic (collaborative)
Non-critical items - Tactical (arms length)
Bottle Necks items - Tactical (close)

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17
Q

Which model should be used to decide if a department should be outsourced?

A

Barnes 2008 Outsource Matrix

Make sure you can draw this!

A review of strategic importance and contribution to operational performance

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18
Q

What is the definition of Insourcing?

A

Where an outsourced activity is brought back in house. Insourcing can only occur if the outsourced provision was original performed in house.

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19
Q

Is it a legal requirement for public procurement to advertise sourcing activity via a website for supplier to see?

A

Yes!

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20
Q

What is a popular starting point of supplier due diligence?

A

Pre Qualification Questionnaire

This can include:

Financial stability, relevant experience, capacity, ethical/ sustainable standard is followed etc

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21
Q

What macro environmental factors affect procurement and sourcing?

A

STEEPLE!

Social
Technology 
Ethics
Environment 
Political
Legal 
Economics
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22
Q

What micro environmental factors affect procurement and sourcing?

A 
Suppliers
Customers
Competitors
Intermediaries
Some public
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23
Q

What internal environmental factors affect procurement and sourcing?

A

Internal politics, stakeholders, processes etc.

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24
Q

What is the definition of TUPE?

A

Transfer of Undertakings (Protection of Employment) reg 2006

Where an outsourced activity leads to a switch of supplier and the new suppler take those staff on as their own and are not allowed to sack them, reduce hours, pay or benefits etc.

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25
Q

Who does TUPE benefit?

A

Incumbent suppliers staff but also purchasing organisation through continuity of service and knowledge

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26
Q

What is the definition

A
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27
Q

What is the definition of Single sourcing?

A

Where an organisation uses one supplier to service all it needs. This may be because they want to achieve economies of scale, order quantities and values are very small or simply one smaller offer outstanding value for money than competitors.

28
Q

What is the definition of Sole sourcing?

A

Where the organisation is stuck for choice and they are forced to choose 1 supplier for all goods/ services. Not quite a monopoly. Usual due to geographic restriction.

29
Q

What is the definition of Dual sourcing?

A

Two supplier provide goods and services. This is often the choice where supply chain risks exist, and the product/ service is of strategic value so if one supplier fails the other can support the organisation to ensure cover

30
Q

What is the definition of Multiple sourcing?

A

Where multiple suppliers are used to supply goods/ services often because product are low in value and risk, competition is vast or where the company had a framework arrangement in place.

31
Q

Remember, RfP deadline for submission must be adhered too and failure must lead to disqualification

A
32
Q

What are the three approaches to tendering?

A

Open - commonly used worldwide when the buyer suspects limited interest in the project so few bids to receive. Therefore, they will likely advertise this project with a far reach and welcome any supplier.

Restricted - project is advertised to interested parties via an expression of interest, who are then required to complete a PQQ to evaluate they meet a set criterion. Basically, this is a two-stage process. The successful supplier is then sent RfP briefs to bid. The key difference between this and Open is the use of two stage inc PQQ. Most common to my role.

Negotiated - where suppliers are chosen for tender based on incumbent relationships. Often cherry picked for their specialisms, currently offer that service or there is a monopoly so only one supplier is available. Hence the negotiated aspect. This has the same initial process as Restricted. It is also common that Negotiated is used for complex projects whereby the buyer will cherry pick the supplier based on complexity of issues and supplier will assist is creation of spec before tender. This obviously has it’s draw back due to the supplier leverage!

33
Q

What are the 5 types of negotiation styles?

A

Make sure you can draw table!

A review of concern for substance and concern for relationship.

Compete – based on assertive stance, even if it is detrimental to the supplier and long-term relationship – Buyer wins, Supplier loses

Collaborate – focus by all parties that everyone needs to benefit, and mutual agreements are made – Buyer wins, Supplier wins

Avoid – Apprehension, lack of confidence leads to positions not being argued and no one benefits from the negotiation – Buyer loses, Supplier loses

Accommodate – negotiator often does no want to offend or upset the other parties so restrict their position of leverage to ensure harmony – Buyer loses, Supplier wins

Compromise – both parties compromise on their positions with the specific aim to ensure relationship is developed by finding mutual gains for all parties – win, win

Think of it from buyers point of view and sake of exam

34
Q

What are the 4 stages of negotiation?

A

Preparation

Information Exchange

Bargaining

Closing

35
Q

What is the definition of Intra-company trading?

A

Business conducted between two companies owned by the same entity. This mean that transaction is complete with in the business. This can occur on the same site or between two countries.

36
Q

What is the definition of Centralised procurement?

A

A head procurement function will often purchase material in bulk for the company and then sell via intra company trading to each company under the entity

37
Q

What is the definition of Decentralised/ Devolved procurement?

A

Each company entity is responsible for their own procurement strategy

38
Q

What is the definition of Transfer pricing?

A

The amount of money payable between international intra company trading. Specific where two companies of the same entity but in other countries trade with each other.

The objective is to reduce the tax payable on profit generate. By doing this, the profit made are pushed to countries where taxes are more favourable!

The benefit of transfer pricing is that is encourage international trade and therefore have an economic benefit to local countries.

Due to purposeful movement of stock and labour to benefit from paying less tax, there is need to regulate it so that it does not become tax avoidance. The Organisation for Economic Co-Operation and Development (OECD) produced a set of guidelines for international tax laws and how transfer pricing can be followed legally.

39
Q

What model should used to development a marking criteria?

A

Carters 10c’s evaluation model

There are 10 points:

  1. Competency
  2. Capacity
  3. Commitment
  4. Control
  5. Cash
  6. Cost
  7. Constituency
  8. Culture
  9. Clean
  10. Communication
40
Q

What is ISO9001 for?

A

Internationally recognised standard for quality management

41
Q

What is the definition of Continuous Improvement/ Kaizen?

A

Concept based on constantly improving processes to eliminate waste

42
Q

What is the definition of Total Quality Management?

A

Organisational culture and attitudes which aim to gain complete customer satisfaction

43
Q

What are the 4 stages of Continuous improvement/ Kaizen?

A

Identify

Plan

Execute

Review

44
Q

Which supplier performance factors is ratio analysis most concerned with?

A

Profitability

Liquidity

Gearing

Investment

45
Q

What is the definition of the the following?

Profitability
Liquidity
Gearing

A

Profitability – Revenue minus cost

Liquidity – A solvency measure to ensure a supplier can cover short term liabilities with current assets

Gearing – A measure of how the supplier funds the business. Based on the ratio of debt to equity.

46
Q

What are the 3 main sources of data to base ratio analysis on?

A

Profit and loss statement also known as statement of comprehensive income

Cash flow forecast – cash flow statement

Balance sheet also known as statement of financial position

47
Q

What ratio are used for Profitability?

Best to write these down as revision…

A

Gross Profit Margin = gross profit (cost of goods sold)/ sale revenue x 100 = %. Ideal result is over 20%

Net profit margin = net profit/ sales revenue x 100 = %. Ideal result is over 15%

EBITDA – Earnings before interest, taxes, depreciation and amortisation

The above shows the supplier ability to turn sales into profit and indicates how well supplier is managing its cost base

Return on assets, return on equity, return on capital show a supplier ability to generate money for its shareholders

48
Q

What ratio are used for Liquidity?

Best to write these down as revision…

A

Current ratio = total current assets/ current liabilities. Ideal result is over 1

The above shows a supplier ability to pay short term debt with assets. This can be undermined by what actual assets the supplier has to sell ad how easy they can be sold.

Acid test/ quick ratio/ liquid capital ratio = (total current assets – stock)/ current liabilities. Ideal result is 1:1

The above shows a supplier ability to meet current liabilities with current assets. This is a more accurate representation of a supplier paying debts as it ignored inventory.

49
Q

What ratios are used for Gearing?

A

Gearing ratio = (long term debt + short terms debt + bank overdrafts)/ shareholder equity. Ideal result is less than 50%

Or it can be simplified to = long term debt/ shareholders’ equity

This is used to show a supplier’s long-term funding of debt in relation to its equity. The proportion of borrowing against its equity. High gearing means there is a lot of long-term debt. Low gearing means the supplier relies on equity capital and is therefore, less risk financially.

50
Q

What ratios are used for Investment category?

A

ROI = net income/ total assets. Ideal result is high as possible
Return on assets = net income/ total assets. Ideal result is over 5%
Return on equity = Net income/ share holders equity. Ideal result is over 15%
Return on capital = Net income - dividends/ debt +equity. Ideal result is higher than cost of borrowing

The above shows how well an organisation uses its assets to generate sales

51
Q

What are disadvantage of ratio analysis?

A

Data used is historic and may not give accurate results

Current rates of inflation are not considered

Ratios do not show reasons for trends. i.e., a supplier may hold higher level of inventory at specific times of year i.e., Christmas.

Operational change i.e. company may have recently investment lots of cash into an investment in capacity recently, or M&A. Mass sales of inventory which is shows unusual low level of inventory when data is used for reporting.

Change in operation and economic factors. i.e., company may have borrowed a lot for capex project, so ratio become unfavorable for a one-off event

Economic factor - the whole industry may be directly impacted by the same factors so it’ snot just joe bloggs with poor ratios at the moment.

Company run different strategies so it may not be appropriate to look at competitor ratio is the same way.

Ratio analysis is purely numerical, and dos does not take account of soft touch assessment of whether a company is unethical in its behavior

Accountancy method vary between company

If some ratios are good and some bad, what does that mean? i.e., they score highly in one area and poorly in another.

52
Q

What are disadvantage of ratio analysis?

A

Data used is historic and may not give accurate results

Current rates of inflation are not considered

Ratios do not show reasons for trends. i.e., a supplier may hold higher level of inventory at specific times of year i.e., Christmas.

Change in operation and economic factors. i.e., company may have borrowed a lot for capex project, so ratio become unfavourable for a one-off event

Ratio analysis is purely numerical, and dos does not take account of soft touch assessment of whether a company is unethical in its behaviour

Accountancy method vary between company

If some ratios are good and some bad, what does that mean? i.e., they score highly in one area and poorly in another.

53
Q

What is the definition of TCO/ Total Life Cycle costs?

A

Total cost of ownership (TCO) and life cycle costs are used interchangeably. They include all cost of owning an asset from acquisition to disposal.

54
Q

What is the definition of Added Value?

A

Deliverables from a supplier which do not lead to additional price to buyer. i.e., innovation, ethics, on time delivery, improved quality etc. They aim to strengthen relationships.

Argument can be made that costs are still passed to customer.

55
Q

Novack and Samco’s 11 stage of sourcing process is as follows. The CIPS proc cycle was based on this model. Novak’s stage three ‘make or buy’ is the same as CIPS proc cycle of ‘Market Commodity & Options’

A 
Identify needs 
Define user requirements
Decide whether to make or buy 
Identify purchase type (new buy, modified rebuy, straight rebuy)
Carry out market analysis 
Identify potential suppliers 
Prescreen supplier and create shortlist 
Evaluate shortlisted suppliers 
Supplier selection 
Final product/ service is delivered 
Evaluate supplier performance
56
Q

What factors should be considered when deciding whether to make or buy?

A

The product/ service i.e. is it a core activity?

The organisations current position? i.e. does the organisation have capacity to make this in house, do they have the expertise?

The current market situation? which would create economies of scale, make or buy? If market price increase will the organisation current volume enable economies of scale and cost savings or would they need to ‘buy’ as the supplier volume is far greater thus greater economies of scale driving cost savings.

The amount of competition? Does the organisation hold a lot of buying power in the market to drive down cost and secure stock to ‘make’? If the organisation does not have sufficient buying power in the market, then ‘buy’ would make sense as they can leverage supplier posotion. However, if there is little competition in the market the organization could be forced into ‘make’ because the single supplier available in the market could charge what ever they want, and would be cheaper to ‘make’ vs ‘buy’.

57
Q

What does a common PQQ criteria look like?

A

Financial stability?
Do they have relevant skills, experience, accreditation?
Do they have capacity, controls and commitment to manage and deliver contract?
Do they follows ethical and sustainable practices?

PQQs also follows carter 10c’s supplier evaluation model.

58
Q

What are carters 10c’s of the supplier evaluation model?

A 
Competency
Capacity 
Commitment 
Control - quality processes 
Cash - financial stability 
Cost 
Consistency 
Culture 
Clean - environmentally friendly
Communication
59
Q

What environmental factor exist to suppliers and buyers?

A

Internal - (organisation stakeholders, processes, policies, limitations etc)
Micro - SSICC (Some public, suppliers, intermediaries, customers & competitors)
Macro - STEEPLE (Social, technology, economic, environmental, political, legal, ethics)

60
Q

What are the common advantage of outsourcing?

A

Access to supplier expertise
Free up time to focus on core activities
Possible risk reduction by sharing responsibility with supplier. Note, their is now risk of supplier messing up also
Reduced over heads (cost savings) less cost of labour, factory/ space lease, energy consumption etc.

61
Q

What are the common disadvantage of outsourcing?

A

Cost of procurement time analysing practicality of options
Cost of procurement tracking supplier performance
Potential cost of paying for dedicated contracts manager to manage performance
Risk of supplier poor performance
Analysis of outsourcing may not have been adequate thus, was not the correct thing to do to drive best value

62
Q

What does a generic tender process look like?

A 
Planning
Initiation (tender) 
Award 
Contract 
Implementation
63
Q

What are the advantages of transfer pricing?

A

Global tax bills can be reduced
Simplifies internal accounting procedures
Entire organisation can have fixed pricing on products/ services
Divisions/ entities can easily be evaluated based on spend
No physical money needs to be transferred between entities

64
Q

What are disadvantage of transfer pricing?

A

Some countries economies can be negatively affects - profit are moved away from their economy
Careful and strict monitoring is needed to avoid tax evasion - OECD regulates it and set guidelines
Sourcing locally may actually be cheaper
Competition amongst company entities

65
Q

What are common models of total quality management systems?

A

ISO 9001 - quality management systems
Kaizen/ continuous improvement
Total quality management

66
Q

What are common supplier evaluation criteria?

A 
Quality 
Environment & sustainability 
Technical 
Systems 
Labour standards 
Financial stability 
Credit rating

L4M4 CIPS (3 decks)

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