Chapter 1

Question 1

What is the definition of Corporate Goals?

Answer 1

Targets set by an organisation that will achieve mission or objectives

Question 2

What is the definition of Business Case?

Answer 2

Document which sets our justification for undertaking project on commercial grounds

Question 3

What is the definition of a Straight Re-Buy?

Answer 3

Purchase of the same item or service last time there was a need and subject to no changes since then.

They are often purchased via approved supplier lists.

Any change to spec or even negotiation of price make it a Modified Re-Buy

They are often associated with MRO items, utilities and raw materials

Often low value, low risk

Often many alternative suppliers available so little risk to supply

Often in the form of a Call Off from existing FWA

Related to Annual Planning Cycle by a need to regularly review business needs and the solutions that meet them

Question 4

What is the definition of a Modified Re-Buy?

Answer 4

Purchase of the same item last time there was a need, subject to change of spec or supplier

A simple negotiation of price or change of spec make an item purchased a Modified Re-Buy

Simple action of purchasing the same item but consolidating supplier into one is a modified Re-Buy too

More effort is needed vs Straight Re-Buy

Often in the form of using the same consultancy service provider but changing the SoW for each engagement, even software license with a specified number of users, or components used in manufacturing with a change of spec

Question 5

What is the definition of a New Purchase?

Answer 5

Purchase of an item or service for the first time, based on a new requirement

Note, if regulation changes an item, it is still a Modified Re-Buy. If that reg calls for a new product to be developed, then it becomes New Purchase.

It requires the most effort of all type of purchase

Items include capital purchases, finished products (as it is not the same component anymore) and products from resale

Will involve cross functional teams to agree on needs of individual departments

Other characteristics:

lots of information needs to be gathered
No existing experience of buying item
Solutions other than a new purchase have been explored

Question 6

What is the definition of Critical Path?

Answer 6

Sequence of steps in a project plan that determine the shortest time to complete a project

Question 7

How would you describe RAQSCI?

Answer 7

Model used to help identify business needs in a methodical order of importance.

Regulatory - regulation of legislation in local country which must be adhered to

Availability - consistency, reliability of supply based on e.g. supplier financials, risk, market risks etc

Quality - this is the consistency and fit for purpose nature of specs

Service Requirements - factors related to the ‘how; services are provided e.g. flexibility, availability, helpdesks etc

Cost - only once the above factors have been considered should cost and price then be considered e.g. benchmarked prices, continuous improvement, target cost and total cost of ownership

Innovation - final step is to look for innovation leading to customer experiencing improvements etc

Why is it important - The order of RAQSCI is crucial as it focuses attention on potential tradeoffs that may be needed

Question 8

Once business need such as RQSCI are completed, they will be used to drive a range of procurement activities:

Evaluation criteria - principle to follow in order to fairly judge something
Performance measures - KPIs, metrics to measure contract performance
Sourcing strategy - re evaluate if needed from changing circumstance

Sourcing strategy definition - plan for creating competitive advance by regularly comparing needs against purchasing opportunities, and mitigating risk where necessary. Failure to produce quality sourcing strategy runs the risk of not achieving a Breakthrough - achieving a significant improvement such as a cost saving, improved quality or greater innovation (must be SIGNIFICANT)

Question 9

What is the definition of Collaborative Agreement?

Answer 9

Long term agreement between buyer and supplier which sets out how and what each party will share with the other when working on a product or service together.

Question 10

Remember, problems can be divided into two groups:

Closed problems - something happened that should not have happened

Open ended problems - something is stopping/ blocking progress/ achievement

Question 11

What is the ‘5 Whys’ analysis?

Answer 11

A model used to ascertain the cause of a problem

Model suggest that you answer 5 different reasons for the problem to exist

From these answers it should be clear which reasons for causing the problem is most prominent - the most prominent answers should be followed by evidence/ data collection to reinforce the conclusion

Question 12

Remember, once a problem has been identified, the following 8 step rule should be followed:

Answer 12

1 What is going on? - closed problems can be identified using KPI and metric and if a target is missed, it suggests a problem exists. The Kepner Tregoe approach can also be used to identify closed problems, which considers asking what the problem is not too t For example, where is the problem, supported by where the problem isn’t which can provide a more holistic view of the problem and avoid a narrow focus.

Open ended questions can be identified by writing problem statement which ask the questions “how do I…”. Good statements should include features of the problem which help point towards the solutions. For example, “How do I create a breakthrough of 20% cost reduction?” Breakthrough suggests that solution needs to be radical and innovative and won’t be a standard. Off the shelf solution and 20% is a high target which must be achieved as a minimum.

2 What do we know? - Data gathering stage which can include verbal comment via interviews or surveys. Sources include, interviews, questionnaires, observations and existing records.

3 What are the underlying issues? - Analyse data from the previous steps and draw conclusions.

4 What could we do - options are generated, using the SCAMPER checklist:

Substitute
Combine
Adapt
Modify
Put to other uses
Eliminate
Reverse

5 What is the best thing to do? - the ideal solution is selected

6 How do we go about it? Implementation plan created and using the RACI matrix to define role and responsibilities:

Responsible - Person who will perform the task
Accountable - Person who has overall control, powers to say yes or no
Consulted - people to who need feedback on progress and may have an input
Informed - people who need to know what decision have been made

7 Have we achieved our objectives? - implementation plan to be executed and test if target has been achieved

8 Can we improve on what we have? - challenge of current process and trigger event defined which cause process to start all over again

Question 13

What does a typical business case include?

Answer 13

Executive summary
Long term strategy consideration
Business requirements
Price and cost analysis
Market analysis
Supply analysis
Technical developments
Vulnerability analysis
Sourcing objectives
Implementation plan
Competitive advantage

Question 14

What types of research exist?

Answer 14

Desk/ secondary research - gathering data from already published sources

Field/ primary research - more specific research usually conducted firsthand to gather raw data. Usually in the form of quantitative or qualitative data

Question 15

What is the definition of indirect and direct costs?

Answer 15

Direct - costs directly related to production of a service of good

Indirect - costs related to the day to day running of operations which cannot be directly attributed to the end product or service. It is also referred to as overhead costs

Note, this is a method of classifying costs.

Question 16

How would you describe the Value Chain?

Answer 16

Michael Porters Value Chain is a set of activities that add value to items a buying organisation purchases so that finished products can be sold at a profit.

See drawing.

Note, primary activities are generally direct costs and secondary activities are indirect costs.

Question 17

What is the definition of Fixed and Variable costs?

Answer 17

Fixed - costs that remain the same irrespective of change in output

Question 18

What is the definition of Fixed and Variable costs?

Answer 18

Fixed - costs that remain the same irrespective of change in output

Variable - cost which vary with level of output

There is also a semi variable cost - this is a combo of variable and fixed cost. For example, a small business uses a part time accountant, however, as business grows to a certain level, they now require the accountant full time making in a fixed cost.

Note, direct and indirect costs can be either fixed or variable costs!

Question 19

What is the definition of Break Even Point?

Answer 19

Level of output at which revenue equals total costs

Marginal profit = sale revenue of 1 x unit minus variable cost of 1 x unit

No of units needed to reach BE = total fixed costs / marginal profit

BE can also be described as fixed costs divided by marginal profit

The importance of procurement knowing a supplier BE is that once reached, the procurement professional should negotiate any additional sale price to not need to include a portion of fixed costs. They may be able to agree that only variable cost-plus a % contribution to profit is paid, thus savings on fixed costs portion - win-win

If a procurement professional knows that a supplier is close to its BE point, the buying organisation could agree to pay full price to help supplier reach BE, then agree to not charge fixed cost there after. Another win-win.

If a supplier charge charges full price including fixed costs after BE point, the supplier is considered to be making ‘super profits’.

Question 20

What is Purchase Cost Analysis (PCA)?

Answer 20

Analyse the cost of thing bought so that strategies can be developed to help reduce those costs whilst improving supplier relationships. This should answer the query, is the price paid the best it could be?

Question 21

What is Purchase Cost Analysis (PCA)?

Answer 21

Analyse the cost of thing bought so that strategies can be developed to help reduce those costs whilst improving supplier relationships. This should answer the query, is cost the best it could be?

Some questions could be:
Are any parts or service unnecessary?
Is the overhead cost allocation subsidising another produce the supplier sells? in general, are they reasonable?

Not all categories of spend would be suitable for PCA. Therefore, using segmentation technique are required. See drawing.

Note, low impact categories, should not use PCA, they should use purchase price analysis PPA.

Arms length - costs should be challenged, not too much care should be given to offending supplier as there is likely other supplier in the market and the product service is not critical to buyer overall success.

Strategic - care should be taken not to offend supplier with challenge of cost and they should be gently persuaded to review cost. They are critical to a buying organisations success. Often to the benefit of the supplier too in the form of higher profits,

Question 22

What different cost and price analysis techniques exist?

Answer 22

Costs:
Cost estimating - arriving at an ‘approximate cost’
Value analysis - systematic analysis and challenging of costs to ensure costs are fair
Supplier cost breakdown - supplier provide breakdown of its costs
Should cost analysis - procurements assessment of what a product or service should cost by analysising cost of components, labour etc
Total cost modelling - use of algorithms to arrive at a probable cost
Open book costing - supplier enables buyer to review all costs to be scrutanised
Target cost analysis - analysis of market price, profit, volume etc to derive a target production cost
Competitive assessment. teardown - disassembling a physical unit so costs can be estimated
Total cost of ownership - total cost of owning an asset over its life time through to decommission
Competitive bids - usual tender process involving multiple supplier bids for competitive purposes
Market comparison - comparing the price of a unit to another supplied by a competitor
Price indexes - percentage change of costs over a given period

Question 23

What is a QFD?

Answer 23

Quality Function Deployment - a structured approach to define customer requirements and translating them into product specifications

Question 24

Remember, Price Analysis is useful on its own to decide if price is fair, however, only if their other supplier product useful as a yard stick.

Cost analysis, is useful to understand the cost that make up price, however, it should be supported by price analysis to understand the true picture of fair pricing

Question 25

Why do supplier of the same product charge different prices?

Answer 25

Suppliers view the market and the buyers they sell too as different levels of attractiveness.

See drawing of combinations:

Strategic - supplier will define their position closely either by price reductions or maintaining price but provided added value benefits

Develop - suppliers will try to expand their business with buyers

Exploit - suppliers seek to drive a premium price/ increases

Nuisance - supplier seek to drive premium price/ increase as they see the buy/ market of little interest and value

Question 26

What does Price Analysis consist of?

Answer 26

Price that have been paid in the past - price must have been reasonable in the past for this to used and adjustment for inflation but be considered. Inflation adjustment could be carried out by using indices.

Published prices - e.g. published catalogues, online, easily obatinable

Pricing formula - for example, building office space can be benchmarked between £2000 & £2200 per square metre

Question 27

What is Quality Assurance?

Answer 27

Processes and activities involved in ensuring no defects in products of service happen

Question 28

What is Whole Life-Cyle Costing?

Answer 28

Technique used to calculate total cost of ownership from acquisition to decommissioning.

There are 3 stages:

1 Planning - three basic group consist of:
Decision support models - ranked alternative based of ability to serve priorities. Ranking is based on a pre-defined criterion

Simulation model - example, labour cost per hour for each activity is a mix of different peoples specialisms and rate so output is a fixed £ per hour, but specifically based on an average of those ranges of £ per hour. The same can be said for how many hour each level of employee specialist would take to complete the task. So you end us with e.g. £100 per hour x 50 hours. The point here is that it can only ever be an estimate and moreover, not a probable one! Monte Carlo model can be used to apply a probability to each of the ranges, plot them on an histogram, and become more accurate by taking those averages from the normal distribution and add x 2 the standard deviation which could give a new estimated cost of e.g. 95% probability. Another key aspect of Simulation models are that they can identify which variable will have the biggest impact to a cost, thus can be targeted to ensure it is made more accurate Normal distr - cluster of point on a graph which cluster around an average value, Stand. Deviation - measures the dispersion of data points from their mean value

Optimisation model - same principle as simulation model but typically used for inventory reordering and lead time rather than costs. if probability of covering lead time with sufficient stock is 95 % then %5 chance of this being a risk. If this is acceptable, then no safety stock is needed.

2 Preparation - testing various models for calculating WLC and find any variable which need further investigation to make them more accurate, thus give a more accurate result

3 Implementation - implement the model to get the result, but continue to assessment to discover further opportunities.

Question 29

As well as the 5 Whys, what other model can be used to ascertain a cause of problems?

Answer 29

Issues Management

This can be used to create objectives for a business case

3 trends to be analysed to help resolve a problem by analyzing if an objective is important to the problem.

External trends - trends in the external market
Internal trends - trend internally such as complexity of the organisation, roles and management style
Performance trends - organisational growth, profitability and flexibility

Question 30

Following objectives stage of a business case, options must be considered to show how business objectives will be reached. , Which Options strategies exist?

Answer 30

Market intervention - tender, make vs buy, supplier rationalisation, encouraging new entrant to market

Technical intervention - rationalising and simplification of specifications, innovation technology and creating intellectual property rights

Cost structure intervention - techniques such as Lean, Six Sigma TCO, value analysis and value engineering

Work Process intervention - seeking breakthrough by partnering with suppliers

Supplier Relationship intervention -leveraging or restructuring relationships with existing suppliers to provide better capabilities or enhance supplier performance

Supply Chain interventions - restructure specific to supply chain not a supplier such as outsourcing services, eliminating middleman etc

Some related definitions:

Hybrid - combination of the best part of different strategies
Lean - management process for reducing waste thus creating more value in processes and activities.
Six Sigma - technique used to identify and reduce variability in processes
Value engineering - review of existing product and its components to reduce costs and increase value to customer

Question 31

Remember, when comparing current strategy/ options with new, you must first list criteria which is to be satisfied, then score the current strategy/ option - this then becomes the ‘datum’. - data point/ benchmark. Strategies scores against criteria is then benchmarked against the ‘datum’.

Each strategy is marked including the datum, to ascertain if a single strategy is best suited to delivering against criteria or if a hybrid of strategies best features is best.

Note, a hybrid strategy can be considered as a single strategy/ option from the outset/ beginning, rather than formulated after marking.

Question 32

What models can be used to assess the worthiness of an option/ strategy?

Answer 32

Hybrid strategy marking
&
Cost Benefit Analysis

Cost Benefit Analysis is a technique used to decide whether a particular course of action is best based on financial impact only. In its simplest form, payback period is an example.

For example, saving from new option. strategy = £1.5m per year
Implementation cost or switching cost from old supplier = £0.5m
= 0.5/1.5= 0.333 years or 4 months

Some cost used for the analysis can be less than obvious. For example, can a number be put on impact to health, impact to reputation or environmental cost? if yes, cost should be quantified and included in analysis.

Question 33

How should risks be assessed?

Answer 33

For example, risk posed by an option can be assessed by assigning a number 1-4 with 1 being low and 4 being high. You would complete this for the impact and then probability. This can be plotted in a simple table using low medium high indicators. See drawing.

Question 34

What is Change Management?

Answer 34

process and techniques used to deal with the people aspect of change to achieve business outcomes

Question 35

How many types of benchmarking exist?

Answer 35

4

Internal benchmarking - business process is compared to another internal process

Competitive benchmarking - business process is compared with a direct competitor

Functional benchmarking - business processes compared to an organization outside of the immediate industry

Generic benchmarking - unrelated business processes from other organisation regardless of industry

Question 36

What are three main activities of a financial budget?

Answer 36

Planning

Control

Decision making - reacting to variances

Budgets should be in a constant state of PLAN, DO, REVIEW cycle

Question 37

What is an accrual?

Answer 37

An adjustment made to a financial account to reflect activity occurred but not yet received payment

months 1 goods are sent out, month 2 payment is received. Accrual needs to be made so that it is clear that payment received in month 2 was for sales in month 1

Figures which use accruals will show in the profit and loss account

Accruals cannot be used in a cashflow account as it tracks the reals in and out goings of the bank account i.e. live and doent month 1 sales to month 2 payment

Question 38

What is the difference between mission statement and vision statement?

Answer 38

Written statement of a company’s purpose which doesn’t not change over time

Sets out rules by which the organisation will conduct its affairs to achieve its mission

Question 39

What are the advantages of budget controls?

Answer 39

Compels management to think about the future

promotes communication and coordination

Require management to be responsible

Acts as a yard stick to measure any variance, identifies variances to be investigated

Improve allocation of scare resources

Enables management by exception principle - with numbers sets manage need only gets involved when numbers hit a threshold. This enables management to avoid day to day management of budget and other activities and only need to allocate precious resource when thresholds are hit. This alleviates resources.

Question 40

What are Zero- based Budgets?

Answer 40

Traditional method of setting a budget is take last years and add x% for inflations. This stifles innovation to cut costs etc.

Zero based budgets force managers to start from Zero each time, from ground up, re justifying why they need X. This encourages alternative ways to deliver a project.

Downside is time resource needed to do it.