Chapter 2

Question 1

What is the definition of Pareto Principle?

Answer 1

80% of events are generate from 20% of causes. i.e., a procurement department 80% of spend is with only 20% of suppliers.

Question 2

What is ABC analysis?

Answer 2

it is linked to Pareto law 80/20 whereby analysis helps categories suppliers into A, B and C categories according to their level of importance and spend.

A= strategic 
B= Close tactical 
C= Transactional

Question 3

What are the most popular indices?

Answer 3

• Stock market i.e., FTSE 100
• Gross domestic product
• CPI
• RPI
• Commodity indices
• Producer price index
• Small business lending index
• CIPS purchasing Manager’s index

Question 4

How many methods are their for a buyer to collate data and what are they?

Answer 4

2

Primary research – the purchaser organises research to be collected by themselves from the source. They may even pay a professional company to collate it on their behalf. “White Papers”

Secondary Research – Information which is already published and publicly visible. Often research papers or indices gathered by another source. Secondary data is therefore much easier and cheaper to collate.

There is drawback to both. i.e., Primary research can have researcher bias as in the researcher wants a particular outcome and can easily distort it. Secondary research may not all be fit for purpose so is the organisation using it qualified to pick out what is useful?
Remember both primary and secondary research can be distorted

Question 5

How many commodity categories are there and what are they?

Answer 5

4

Metals

Energy

Agriculture

Livestock

Acronym (MEAL)

Question 6

Remember,…

Commodities managers will study their categories by analysing historical price paid and those projected in the future. They will apply forecasted sales to apply volume and leverage. One way of buying based on today and tomorrow price which is subject to market fluctuations is to hedge. This involves the commodity manager searching for Futures contracts on via commodities markets whereby a seller agrees to sell the items on an agreed date in future for an agreed amount of money. Win or lose.

A popular commodity exchange is the (LME) London Metals Exchange

Procurement professionals should work closely with sales and their sales forecast to help plan/ predict volumes of material to source today for tomorrow’s demand. One model to help ascertain this is Porters 5 forces

Answer 6

.

Question 7

Remember, market conditions can be Perfect and Imperfect. Definitions as follows:

Answer 7

Perfect – where there is adequate supplier competition

Imperfect – where there is only one supplier

Question 8

What is the definition of ERP?

Answer 8

ERP – Enterprise Resource Planning

Question 9

Are credit scores weighted and how?

Answer 9

Yes!

• Payment history – 35%
• Amount owed – 30%
• Length of credit history – 15%
• New Credit – 10%
• Credit mix – 10%

Remember, suppliers low score may not be for direct reasons. i.e. company may be newly incorporated, not have an debt history, may not have high level of assets to act collateral yet. Further due diligence would be needed, rather than just rely of a credit search. Buyer could go forward with low score supplier for these reason and mitigate risk by adding terms to contract in their favor. i.e. Buyer agrees to pay supplier on more regular basis (14 vs 30 days), or accept more regular deliveries helping with supplier capacity and ability to invoice quicker and more often.

Question 10

Remember, steering groups and cross functional teams are the same thing.

Question 11

Me

Question 12

What does MEAT stand for?

Answer 12

most economically advantageous tender (submission made)

Question 13

What does a balance sheet show?

Answer 13

An organisation financial position at a single point of time.

Question 14

Which financial activities does a cash flow statement look at?

Answer 14

Operating activity – payment to staff and suppliers

Investing activity – interest received, and debts paid

Financing activity – payments to shareholders

Question 15

Which ratios are linked to cash flow statement?

Answer 15

Operating profit ratio = operating income/ revenue x 100

Dividend per share ratio = ordinary dividend for the year/ number of ordinary shares in issue

Question 16

What is the definition of Reverse auction?

Answer 16

Reverse auction – where the buyer advertises a job and bidding will decreases as time goes on. Supplier will be less and less willing to put a cheaper bid in as their profit is at risk. Opposite to a traditional auction where bid increase over time as people try to gazump each other.

Question 17

What is the definition of Reverse auction?

Answer 17

Reverse auction – where the buyer advertises a job and bidding will decreases as time goes on. Supplier will be less and less willing to put a cheaper bid in as their profit is at risk. Opposite to a traditional auction where bid increase over time as people try to gazump each other.

Question 18

What is the ranked order of credit weighted scores?

Answer 18

Payment history - 35% 
Amounts owed - 30%
Length of credit history - 15%
New Credit - 10%
Credit mix - 10%

Question 19

What steps are there in the tender process according to CIPS?

Answer 19

Develop tender & evaluation criteria
Send out RfI to potential suppliers
Send out PPQs to qualify suppliers
Issue tender document and invite to qualified suppliers
Hold an internal meeting with stakeholders
Receive bids from suppliers and evaluate
create supplier short list
Carry out further due diligence
select best value supplier
offer contract

Question 20

What is the definition of an future exchange?

Answer 20

This is where currency or commodity futures (financial contracts) are bought and sold.

Question 21

Remember, PQQ are a form of RFI. RFI focuses on mass, i.e. RFI is sent before PQQ to understand market conditions. RFI would create numerical values of no of supplier, level of competition, no of interested suppliers, capacity in market and suppliers. PQQ is then sent to those shortlisted supplier for further review.

Question 22

What are the advantages to procurement e-systems?

Answer 22

Speed of process
Access to more suppliers
Working hours less of a restriction 
Easier to work globally 
Environmentally friendly - paper free 
Easier access - click of button 
Live information 
Reduction in manual process - tech allows quick review of docs
No need for face to face negotiations
Enhanced reduction of costs as supplier can continuous offer lower rebids

Question 23

What are the disadvantages to procurement e-systems?

Answer 23

Less personal 
Communication to be misrepresented 
Technology could fail for buyer
Technology could fail for supplier - unable to submit bid on time 
Promotes negative work life balance 
Impersonal 
Supplier may bid lower than what is economically viable 
Lack of supplier relationship building

Question 24

CE marking on products means European Conformity in English. Conformite Europeene in French. Products must hold this to be sold in EU

British Standards Institution is responsible for kite mark on product. Products must hold this to be sold in UK

Both are used internationally too.

Question 25

Remember, EU/24/2014 directive directly influence UK Public Contract Regulation 2015.

What tender procedures are suggested by both directives?

Answer 25

Open procedure (no PQQ, no 2nd stage)

Restricted procedure (When interest may be high and 2nd stage is needed, PQQ)

Competitive procedure with negotiation (like restricted but supplier are advise in advance that further negotiation will be required, following submission)

Competitive dialogue (like restricted but allow buyer/ supplier dialogue after invite but before evaluating bids)

Innovation partnership (where the product/ service does not exist in market already and buy supplier must work in partnership to deliver project)