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CIPS L4M2 - Defining Business Need > Chapter 1.2 > Flashcards

Chapter 1.2 Flashcards

1
Q

What 3 things will understanding the business requirements help you target?

A
  1. Which market to analyse
  2. The kind of information that needs to be collected
  3. Collection from what source
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2
Q

Name 2 ways to collect further data

A
  1. Desk research
  2. Field research
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3
Q

What is desk research also known as?

A

Secondary research

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4
Q

What does desk research involve?

A

Gathering data from already published resources

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5
Q

Name 3 examples of desk research

A
  1. Market reports
  2. official statistics
  3. Trade publications
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6
Q

Name 8 sources that market reports can be otained from

A
  1. The local business reference library
  2. Trade associations
  3. UK Statistics Authority website
  4. National newspapers
  5. Chamber of commerce and local authorities
  6. Internet
  7. Commercial publishers of market reports
  8. The business will have its own data
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7
Q

Name 6 questions to ask when monitoring supply market trends

A
  1. Is demand for the product growing or shrinking?
  2. Is there any forthcoming legislation that might affect the market
  3. What are the general economic and market trends?
  4. How are competitors in the supply market changing - what are their plans?
  5. How might customer requirements and buying behaviour change in the future?
  6. What new products are in the supplier’s pipeline - could they make the one that is being bought look outdated?
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8
Q

Name a disadvantage of the internet as a source of market insight?

A

Not all the information on the internet is reliable

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9
Q

Name an advantage of field research

A

The data is more detailed and specific

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10
Q

Define field research

A

The collection of original or raw data which can be quantitative or qualitative

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11
Q

What is field research also known as

A

Primary data

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12
Q

What is quantitative data

A

Statistical data - provides numerical information

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13
Q

What is qualitative data

A

It tells you about people’s thoughts and feelings

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14
Q

Name 5 best practise principles to ensure you gather useful and unbiased data when conducting field research

A
  1. Choose a suitable sample of people to talk to
  2. Choose the best questioning style
  3. Avoid leading questions
  4. Consider how reliable your results are
  5. Analyse the results fairly
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15
Q

What’s one of the best methods of market research

A

Talking to customers and monitoring their buying habits and how they behave

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16
Q

What does a pricing strategy refer to?

A

The factors an organisation will consider when selling an end product or service

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17
Q

Why do procurement professionals need to be aware of pricing strategies?

A

To optimise their market position and ensure they are achieving the best value outcomes

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18
Q

Name 9 examples of pricing strategies

A
  1. Market penetration
  2. Market skimming
  3. Cost-plus
  4. Marginal
  5. Going rate
  6. Premium
  7. Buyer-based
  8. Discriminating
  9. Captive
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19
Q

Market penetration

A

Using a low price to win a large share of the market

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20
Q

Market skimming

A

Used in the absence of competition. A new product is priced high to make a large profit from purchases from initial customers. When competition does occur, the price is usually lowered

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21
Q

Cost-plus pricing

A

Production costs are calculated and a margin added for profit

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22
Q

Marginal pricing

A

Once all fixed costs have been recovered, the cost of any extra sales is the only variable cost associated with the product/service being sold. This permits pricing at below the total cost to be profitable

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23
Q

Going rate pricing

A

Pricing a product at a similar level to the competition

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24
Q

Premium pricing

A

Pricing products or services high because the market is prepared to pay for it. Usually associated with premium brands, with a reputation for quality or luxury

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25
Q

Buyer-based pricing

A

Pricing at a level the buyer will pay

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26
Q

Discriminating pricing

A

Such as off-peak, special rates for children and pensioners

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27
Q

Captive pricing

A

Pricing high because the buyer has no choice but to buy from the supplier relationship pricing. The price is aimed at maintaining a long-term relationship with the buyer

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28
Q

Define open-book costing

A

The supplier provides complete transparency of the costs associated with producing a product or service, which the buyer can analyse to ascertain if the final cost price is fair

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29
Q

Request for information (RFI)

A

A document used to gather information about suppliers and their capabilities prior to a formal procurement process

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30
Q

Request for quotation (RFQ)

A

An invitation to suppliers to bid on specific products or services

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31
Q

Request for proposal (RFP)

A

A document used to canvass potential solutions from suppliers when the specification is still unclear

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32
Q

Does an RFI imply that any procurement activity will subsequently be made or contract awarded?

A

No

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33
Q

What is the RFI often used as?

A

The initial step before RFQ or RFP

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34
Q

Name 5 useful points to consider in the RFI stage?

A
  1. Questions should be framed in such a way that the suppliers are invited to challenge what they are being asked for
  2. Remember that the purpose of an RFI is to gather information so the document should be brief
  3. An RFI is not a promise of any work, but it needs to be worded in such a way that it gets suppliers inetested
  4. Questions should focus on the supplier’s understanding and interpretation of the organisations problem and not on the suppliers capabilities
  5. Suppliers should be encouraged to ask questions
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35
Q

Direct costs

A

Costs that are directly associated with the production of a good or service

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36
Q

Indirect costs

A

The general running costs of the organisation - these costs cannot easily be attributed to specific products or services (also known as overheads)

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37
Q

Value chain

A

A business model created by Michael Porter that details the set of coordinated processes, people and resources within an organisation which generates corporate value

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38
Q

Name 2 important concepts when attempting to estimate costs and prices

A
  1. Identification
  2. Definition
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39
Q

What’s a sophisticated way of looking at the make-up of an organisation

A

Porter’s value chain

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40
Q

Name the 5 primary activities in porter’s value chain model

A
  1. Inbound logisitics
  2. Operations
  3. Outbound logistics
  4. Sales and marketing
  5. Service
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41
Q

Define inbound logistics

A

Interactions with suppliers and the activities of receiving, storing and distributing supplies internally

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42
Q

Define operations

A

All the activities which turn inputs into goods and services which can be sold to customers

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43
Q

Define outbound logistics

A

Activities that receive products from operations, store them and deliver them to customers

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44
Q

define sales and marketing

A

Activities that find and keep customers, make them aware of the products and services on offer and determine prices

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45
Q

Define service

A

Activities that maintain products after sales and achieve customer care

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46
Q

Name 4 secondary activities of porters value chain

A
  1. Firm infrastructure
  2. Human resource management
  3. Technology development
  4. Procurement
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47
Q

What type of costs are primary activities usually?

A

Direct costs

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48
Q

What type of costs are secondary activities usually?

A

Indirect costs

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49
Q

Fixed costs

A

Business costs that remain the same irrespective of the volume if activity of a business

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50
Q

Variable costs

A

Costs that change in proportion to the output of the business. They increase as the volume of the product or service produced is increased. As sales increase, variable costs increase. As sales go down, variable costs go down. For example, the amount of materials that are used or the cost of hours worked

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51
Q

Name another method of classifying costs

A

To identify whether they are fixed costs or variable costs

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52
Q

Do fixed costs change with output?

A

No

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53
Q

Do variable costs change with output?

A

Yes

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54
Q

If no products are made what would the variable cost be?

A

Zero

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55
Q

Can both direct and indirect costs be fixed and/or variable?

A

Yes

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56
Q

Semi-variable costs

A

A cost that is made up of both a fixed cost and a variable cost

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57
Q

Name 3 analysis’ used to estimate costs and prices

A
  1. Break-even analysis
  2. Purchase cost analysis
  3. Purchase price analysis
58
Q

Break-even point

A

The level of output of a business at which revenue equals total costs

59
Q

Calculation for marginal profit

A

Marginal profit = Sales revenue - Variable cost

60
Q

Calculation for break-even point

A

Break-even point = fixed cost / marginal profit

61
Q

Super-profits

A

Excess of average profit over normal profit

62
Q

What can the break-even point be used for?

A

Negotiations

63
Q

When will a supplier make super profits?

A

If a supplier charges the full price for additional work over and above its break-even point

64
Q

Procurement Cost Analysis (PCA)

A

The analysis of the cost of the individual materials, components and activities that make up a purchased item

65
Q

Name 6 key questions that PCA helps to answer

A
  1. Which costs are both necessary and legitimate in manufacturing this product or delivering this service?
  2. Are the values for these necessary cost items reasonable?
  3. Is the overhead allocation to this item potentially subsidising another item which the supplier sells
  4. Is the basis for allocating overheads reasonable?
  5. Has the supplier included allowances for contingencies?
  6. Are the resulting profits reasonable but not excessive and sufficient to keep the supplier motivated and interested in the organisations account?
66
Q

What question does the PCA help to answer?

A

Is the price paid for goods and services the best it could be?

67
Q

PCA Matrix - Leverage focus, name 5 cost analysis techniques

A
  1. Cost estimating
  2. Value analysis
  3. Supplier cost breakdowns
  4. ‘Should cost’ analysis
  5. Total cost modelling
68
Q

Cost estimating

A

The process for arriving at the approximate cost of a product or service

69
Q

Value analysis

A

The process of analysing costs to identify cost reduction and cost control opportunities to ensure that a product or service production costs are as efficient as possible in order to maximise profit

70
Q

Supplier cost breakdowns

A

Where the supplier provides a breakdown of its costs and profits

71
Q

‘Should cost’ analysis

A

A technique used by procurement for determining what a purchased product or service should cost based on the materials, components, processes and overheads of the supplier

72
Q

Total cost modelling

A

S process which uses algorithms designed to arrive at the provable cost of a product or service

73
Q

PCA Matrix - Strategic focus, name 4 continuous improvement techniques

A
  1. Open-book costing
  2. Target cost analysis
  3. Competitive assessment/’teardown’
  4. Whole-life cost analysis
74
Q

Open-book costing

A

A process whereby one party agrees to allow the other access to its finances to scrutinise and analyse costs

75
Q

Target cost analysis

A

An analysis of market price, volume and profit, from which a target production cost is derived

76
Q

Competitive assessment/teardown

A

The act of disassembling a competitor or supplier product into its component parts so that its costs can be estimated

77
Q

Whole-life cost analysis

A

A structured approach to calculating the full end-to-end cost of providing a service, manufacturing, or procuring a product

78
Q

PCA Matrix - Low impact focus, Name 6 price analysis techniques used

A
  1. Competitive bids
  2. Comparison price lists/catalogues
  3. Market comparisons
  4. Comparison to past and historical prices
  5. Price indexes
  6. Comparison to similar purchases
79
Q

Competitive bids

A

Supplier’s submissions in the process, by which an organisation selects from a number of competing suppliers to award the contract

80
Q

Market comparisons

A

An approach for assessing the price of a product or service by comparing it to similar ones available in the market

81
Q

Price indexes

A

A way of showing the percentage change in prices over a given period, based on a starting year (the base) which is taken to be equivalent to 100%. Indices above 100 indicate a rise; indices below 100 indicate a fall

82
Q

PCA Matrix - Critical projects focus, name 3 life-cycle costing techniques

A
  1. Whole-life costing or total cost of ownership analysis
  2. Life-cycle costing
  3. Total cost analysis of the supply chain
83
Q

Life-cycle costing

A

Relates to all costs of acquisition, owning and running the asset but does not include disposal

84
Q

Arms-length relationship

A

The relationship between two parties where either or both of the parties are not interested in developing a closer relationship

85
Q

Strategic suppliers

A

Those who have an integral role in an organisations value chain over and above the provision of a product or service

86
Q

Non-profit organisation

A

A type of organisation that does not earn profits for its owners but reinvests any revenue back into the organisation

87
Q

Quality function deployment (QFD)

A

A structured approach for defining customer requirements and translating them into product specifications

88
Q

What tool should you apply in an arms-length relationship to build a case for the supplier reducing its prices

A

All tools available

89
Q

What’s the aim with strategic suppliers?

A

To work cooperatively with them to find ways of reducing costs to achieve a target cost

90
Q

Calculation for target cost

A

Sales price - Profit = Target cost

91
Q

What’s the equivalent to a target cost for a public sector or non-profit organisation?

A

The proportion of revenue that the product or service should equal

92
Q

What’s the starting point for setting target cost

A

To carry out a procurement cost analysis (PCA) to understand which components of the product or service are important to the customer

93
Q

Name a way of collecting and analysing the data needed for target cost setting?

A

Quality function deployment

94
Q

Price analysis

A

An approach for testing whether or not the price paid for goods or services is fair

95
Q

What’s the next step after the procurement cost analysis?

A

Understand price analysis

96
Q

Name a way to assess the fairness of a purchase

A

By analysing the price without investigating the costs used by the supplier in arriving at the price

97
Q

What two topics are often overlooked?

A

Sustainability and ethical considerations

98
Q

What should be considered alongside the cost or price?

A

Quality

99
Q

What does the Iron triangle model add?

A

The concept of time to give the Quality-Time-Cost (QTC) assessment

100
Q

Why do suppliers charge different prices for the same item?

A

Individual suppliers view both the market they supply to and the buying organisation as an account

101
Q

Supplier Preferencing Matrix - Strategic

A

Suppliers will defend their position vigorously

102
Q

Supplier Preferencing Matrix - Develop

A

Suppliers will try to expand their business with buyers and seek new opportunities

103
Q

Supplier Preferencing Matrix - Exploit

A

Suppliers will seek to drive a premium price

104
Q

Supplier Preferencing Matrix - Nuisance

A

Suppliers will seek to maximise prices as they have low interest in this market or the buyer’s account

105
Q

Name 4 other influences on the price charged at any one time

A
  1. The need to keep the workforce busy (low price)
  2. An attempt to buy the business by predatory pricing because either the supplier wants to break into a market or defend it from new entrants
  3. There is great competition among suppliers and they are prepared to take a price that covers direct costs and makes a contribution to overhead recovery (low price)
  4. The supplier has plenty of work and sees winning the buyer’s business as a way of achieving a premium profit (high price)
106
Q

Price comparator

A

A price that can be used as a benchmark against which the price of other products with similar characteristics can be assessed

107
Q

What is price analysis a process of?

A

Comparing the price paid against a price comparator

108
Q

Name three sources of price comparators

A
  1. Prices that have been paid in the past
  2. Published prices
  3. Pricing formula
109
Q

What must you remember to do when using previous prices in a price analysis

A

Make some adjustment if there has been a period of inflation (or deflation) since the purchase

110
Q

What can you use to adjust price for inflation or deflation?

A

A price index

111
Q

Name another way analysing prices

A

Using market competition to give each supplier’s best price for comparison

112
Q

Name 5 pre-requisites of competitive bidding

A
  1. The value of the purchase must be high enough to justify the cost to both side in preparing and analysing bids
  2. The specification must be explicitly clear and unambiguous
  3. The market must contain an adequate number of suppliers to ensure competition
  4. Suppliers must be technically qualified and actively want the contract so that they are willing to be price competitive
  5. There must be sufficient time for using this method of pricing
113
Q

Name 4 reasons for not using competitive bidding

A
  1. When it is impossible to estimate costs with a high degree of certainty
  2. In situations where price is not the only variable
  3. If changes to the specification or some other aspect of the contract are anticipated
  4. Where significant set-up costs are a major factor
114
Q

Name 3 terms for costing mechanisms

A
  1. Whole-life costs (WLC)
  2. Total cost of ownership
  3. Life-cycle costs
115
Q

Which costing mechanism term do public sector practitioners talk about?

A

Life-cycle Costing (LCC)

116
Q

Which costing mechanism do private sector practitioners talk about?

A

Total cost of ownership or whole-life costing

117
Q

Which costing mechanism does CIPS favour?

A

Whole-life costing

118
Q

What does WLAM stand for?

A

Whole-life asset management

119
Q

Define whole-life asset management

A

The process of evaluating the total price and all associated costs of a product to make an informed decision as to which option will provide the best value for money

120
Q

Where is whole-life asset management most commonly used?

A

In relation to fixed assets

121
Q

What can some aspects of asset management be applied to?

A

The management of a service

122
Q

What does whole-life asset management monitor?

A

The performance of the asset once it is in situ and calculates the optimum time to replace or refurbish the asset

123
Q

What three things can be used to support whole-life asset management?

A
  1. WLC
  2. TCO
  3. LCC
124
Q

Name 4 costs that should be considered under whole-life costs

A
  1. Acquisition costs
  2. Processing and maintenance costs
  3. End of life costs
  4. Non-value adding processes
125
Q

Total cost of acquisition

A

The total cost incurred in acquiring a product from sourcing to receiving and installing

126
Q

Quality assurance

A

Systematic processes and activities that together have the effect of preventing mistakes in the manufacture of a product or delivery of a service

127
Q

What can alter a purchasing decision?

A

Knowledge of the WLC

128
Q

What can knowing the WLC and its cost elements indicate?

A

Where major cost savings may be

129
Q

What are the 3 stages of calculating WLCs?

A
  1. Planning
  2. Preparation
  3. Implementation
130
Q

What should objectives have in the planning stage of WLCs?

A

Defined outputs that help management to reach a decision about the purchase to be made

131
Q

Name 5 examples of typical objectives

A
  1. Determine a budget for the asset being procured
  2. Help clarify the contents of a contract
  3. Identify any support that might be needed to use the asset effectively and efficiently
  4. To help improve the specification of the asset in order to reduce costs
  5. To identify the range of output that the asset can achieve before additional costs need to be incurred
132
Q

Name the 3 basic groups of the WLC model

A
  1. Decision support models
  2. Simulation models
  3. Optimisation models
133
Q

Decision support models

A

Designed to rank possible alternatives based on a set of agreed priorities

134
Q

Simulation models

A

Take into account the fact that some of the cost variable are not specific values but can come from a range of values

135
Q

Give an example of a simulation model

A

Monte Carlo Model

136
Q

Monte Carlo Model

A

A mathematical technique that generates and uses random numbers in the modelling of risk

137
Q

Histogram

A

A graphical display in which data is grouped into ranges and then the frequency of those ranges is shown as a bar chart

138
Q

Normal distribution

A

An arrangement of data points in which most of the points cluster around an average value with the remainder of the data points falling away to extremes on both sides

139
Q

Standard deviation

A

A statistical term to calculate how much the conformance of an item deviates from the mean

140
Q

Optimisation models

A

Most frequently used to calculate support costs, such as inventory levels or maintenance regimes

141
Q

Lead time

A

The amount of time from placing the order to the goods/services being delivered

142
Q

Safety stock (buffer stock)

A

Stock held as a contingency or insurance against disruption or unexpected demand

CIPS L4M2 - Defining Business Need (12 decks)

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