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CIPS L4M7 - Whole-life asset management > Chapter 3.2 > Flashcards

Chapter 3.2 Flashcards

1
Q

Fixed assets

A

An accounting term used to describe items acquired by an organisation which are not routinely sold but used within the organisation. Typical examples are land and buildings, fixtures and fittings, office and warehouse equipment. Fixed assets are also known as non-current assets

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2
Q

Can a whole-life cost model apply to any stock item?

A

Yes

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3
Q

What does the short-term nature of current asset stock mean in practise

A

That the detailing required and the number of tasks to track make using the model expensive in terms of time taken to record and document costs accurately

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4
Q

How can part of the whole life cost model be useful?

A

It highlights differences and helps to make current asset stock decisions

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5
Q

What does whole life asset management refer to?

A

The management of the costs and resources required over the whole-life of an asset

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6
Q

What is whole life asset management commonly used in relation to?

A

Fixed assets

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7
Q

Why is whole life asset management a resource-intensive process?

A

it requires continuous process and performance monitoring and management

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8
Q

What does whole life asset management monitor?

A

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

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9
Q

Name 2 things that can also be used to support a whole life asset management analysis

A
  1. Total cost of ownership
  2. Life-cycle costing
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10
Q

What kind of model do public sector practitioners use?

A

Life-cycle costing

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11
Q

What kind of model do private sector practitioners use?

A

Total cost of ownership / whole life costing

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12
Q

Name 2 times the whole life asset management models are used?

A
  1. Prior to an investment decision, in order to allow comparisons between options
  2. During the lifetime of an asset, where additional costs have been encountered or new asset investment opportunities are considered
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13
Q

When is it reasonable to track actual costs against original forecasts

A

If a whole life costing is prepared prior to investment

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14
Q

Provide a 5 step overview of the whole-life cost cycle

A
  1. Requirements and investigations of options
  2. Decision based on WLC comparisons between options
  3. WLC actual costs compared to forecasts during lifetime
  4. Mid-life review and possible early disposal
  5. Emd-of-life review against WLC and report prior to new investment
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15
Q

Name 5 ways that whole life asset management and WLC analysis can help organisations

A
  1. Ensures that all costs are examined from a long-term perspective and drives procurement professionals to consider cost elements beyond just the initial purchase price
  2. Procurement professionals are forced to consider the impact that the purchase, hire or lease of an asset, item or service may have on other business functions, both financially and in terms of resource
  3. An accurate purchase valuation, procurement professionals are forced to understand, map and measure the cost impact of all activities related to the purchase
  4. WLC analysis can also involve the use of a discounted cash flow calculation which is the process of evaluating the future net cash flows from expenditure and any income from potential sale value generated by a project or plant during its expected life cycle by discounting them back to their present data value
  5. It helps organisations consider the environmental aspects of asset management. As part of the whole life asset management process, organisations will need to account for the safe and responsible disposal of waste materials, end-of-life options for the asset itself, and the energy use and options available to power it
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16
Q

Discounted cash flow

A

An investment appraisal method based on future cash flows and the time value of money

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17
Q

Brainstorming

A

Where individuals or a group are invited to suggest wide-ranging ideas to solve a problem, encouraging a large number of potential ideas

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18
Q

What are the figures used to assess costs in whole life asset management?

A

Future estimates based on factual evidence - these estimates may be based on a buying organisations previous experience, supplier estimates or standard costs used when estimating costs of similar items

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19
Q

Name 6 sources that may be used to get best estimates

A
  1. Past projects should be checked for spend and overspending with evidence of unexpected additional costs
  2. Suppliers should be asked for any installation or implementation checklists or example invoicing detail that can confirm the costs already indicated
  3. Suppliers may be able to provide examples of trade-in values for equipment previously sold
  4. Suppliers with significant interest in environmental issues may be able to supply details of materials that may be recycled
  5. It may be possible for the supplier to provide reference sites where recent installations have been completed
  6. Any standard costs included should be tested to ensure that the latest project is likely to follow previous time and cost allowances
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20
Q

What could brainstorming across different internal functions produce?

A

Previously unconsidered additional costs

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21
Q

When is the development of a full whole life asset management assessment likely to be cost effective?

A

Larger purchases

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22
Q

Name 6 ways a larger purchase could be determined?

A
  1. Lifetime
  2. Spend (annual)
  3. Spend (initial cost)
  4. Spend (percentage of capital expenditure)
  5. Importance
  6. Risk
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23
Q

What is the objective of whole life asset management and whole life costing

A

To include all costs, but the acquisition cost element itself could be severely affected by an extended whole life costing analysis

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24
Q

What does the whole life costing require?

A

Assumptions and estimates

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25
Q

What is one of the most difficult assumptions to make in regards to cost and risk of whole life asset management?

A

The effective lifetime of use of equipment in a business

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26
Q

Name 2 costs of whole life asset management

A
  1. Finance costs
  2. Detailing costs, budgeting and investment appraisal
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27
Q

Name 4 things an organisation may have to do in order to finance a fixed asset

A
  1. Have retained profits
  2. Borrow from a lender
  3. Obtain extended credit from a supplier
  4. Take a lease
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28
Q

Why should the total cost of finance be compared?

A

Because although interest rates may be quoted, the basis of interest can also vary

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29
Q

What may an organisations approval procedure involve?

A

A series of financial and risk assessments along with detailed implementation plans

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30
Q

What does a detailed cost breakdown need to allow for?

A

The impact of time - some costs may decrease but in most cases both labour costs and material costs would be expected to increase over the projected life of the asset

31
Q

Name 3 ways to allow for cost increases in the detailing of costs

A
  1. Looking at historic general cost increases and extending the trend for the lifetime of the asset for each of the non-fixed costs
  2. Taking the best current estimates for future costs from industry or national statistics and applying these to the non-fixed costs
  3. Making individual assessments on each cost element
32
Q

Are the assumptions and predictions made for non-fixed assets likely to be 100% correct?

A

No

33
Q

How far in advance do some investments require accurate estimates for?

A

25 years

34
Q

What does the document set for the fixed asset acquisition proposal need to have?

A

Summaries of the various costs arranged in various ways

35
Q

Give an example of the document set for the fixed asset acquisition proposal

A

The overview of the costs along with the timing over the anticipated lifetime of the asset

36
Q

List 4 examples of information which may be contained in a project whole life cost and savings analysis

A
  1. Purchase cost
  2. Total costs for year
  3. Disposal value less disposal costs
  4. Cost savings predicted
37
Q

Net present value (NPV)

A

An accounting term for an amount in the future, adjusted to ‘todays’ value by a calculation. This allows a comparison between different projects in the same basis

38
Q

Name 8 hidden costs, global sourcing and risks associated with the extended supply chain

A
  1. Country risk
  2. Logistics and transport issues
  3. Export and import and taxes/non-tax barriers
  4. Contractual issues
  5. Currency issues
  6. Ethical issues
  7. Translation costs
  8. International payment costs
39
Q

Name 12 country factors that may affect the supplier and the supplier’s ability to perform the contract

A
  1. Actions by governments to restrict or refuse export/import
  2. Imposition of higher taxes
  3. Restrictions or prohibitions on the use of certain materials, substances or processes
  4. Restrictions on borrowing and investment
  5. Revaluation of a currency or actions causing currency values to wildly fluctuate
  6. Restrictions on the availability of funds from other countries
  7. Restriction on making payments to other countries
  8. Industrial relations problems and civil unrest
  9. Human rights issues and social justice problems
  10. New or revised laws, increasing costs for the supplier
  11. Energy or infrastructure failures
  12. Natural disasters
40
Q

What can classify country risk and undertake individual organisation credit risk analysis

A

Credit reference agencies

41
Q

What should be undertaken to assess country risks

A

Research - government reports

42
Q

Ex-works (EXW)

A

The incoterm given to a price for collection from the supplier’s location rather than delivered to the buyers site

43
Q

Delivered duty paid (DDP)

A

The incoterm where the goods are delivered to the buyer’s premises with all taxes and levies paid

44
Q

Free on board (FOB)

A

The incoterm that applies when the freight is put on board the shipping vessel

45
Q

What do risks associated with transport tend to increase with?

A

The number of methods of transport used, the distance and time taken

46
Q

What are risks covered by in international logistics?

A

Incoterms

47
Q

What is preparing for international transport likely to involve?

A

Special packing and documentation

48
Q

What does global sourcing involve?

A

Export from one country and import to another

49
Q

What do all international transactions require?

A

Documentation sets with clear origins of products or materials. The creation of the document sets could represent added costs to the supplier or buyer

50
Q

What may export or import between two countries require?

A

Licensing and/or payment of taxes or duty payments even if there is a free trade agreement in place such as within the EU, Pacific region, Southern Africa etc

51
Q

What may licensing require?

A

Specific payment and could also involve a government approval process

52
Q

What may local regulations relating to specific products mean?

A

That testing on arrival in a country is required in order to ensure compliance has taken place

53
Q

What contractual issues could be involved in international sourcing?

A

The contract needs to specify the country of the legal framework and the location of any court which applies in the event of an action or interpretation

54
Q

Name 3 currency issues if international sourcing

A
  1. If the purchase is to take place in the buyers currency then the buyer will not need to cover the possibility of a change in the value of the contract
  2. As some machinery is only built to order or built to specification there is a chance that the cost expressed in another currency may change during the build and before the final payment is due
  3. Some currencies can vary by a large margin during a year, but others can have a limited variation or volatility
55
Q

How can a currency risk be assessed?

A

Using previous rates, but there is no certainty that these rates or trends will continue

56
Q

When might the hidden risks and costs affect the whole life cost accuracy

A

When you dont have an understanding of the supply chain and linkages

57
Q

What might ethical issues be connected to?

A

Legal requirements

58
Q

Name 2 key issues for organisations

A
  1. Dual standards - issues that would not be acceptable in a buyer’s organisation but are accepted as suppliers business practise
  2. Supply chain mapping and auditing - the immediate supplier may have been audited and has the ‘right policies’
59
Q

Name 4 things that are often reported with high-profile difficulties

A
  1. The difference between a minimum legal wage and a living wage
  2. The difference between employment legislation and employment best practise
  3. The differences between audit requirements and expectations when working across sectors
  4. The differences in attitudes to the environmental impact of operations, including materials and waste
60
Q

Name 3 ways you can ensure an ethical supply chain is in place

A
  1. Visits and auditing the supply business itself
  2. Using a third-party auditor to visit and audit
  3. Relying on a certification to a national, international or industry standard
61
Q

Name 5 examples of memberships or certifications

A
  1. Chartered Institute of Procurement and Supply
  2. International Ethics Standards for the global property market
  3. International Ethics Standards Board of Accountants
  4. Chartered Insurance Institute
  5. CIPD (Human Resource Professionals)
62
Q

What is more likely to be effective than voluntary codes of practise

A

Organisational ethical codes linked to disciplinary procedures (if not followed)

63
Q

What are more likely to be seen in the context of capital expenditure purchases

A

Organisation-developed ethical codes addressing the specific values and expectations of staff

64
Q

Where is translation of contractual documentation, instructions and important documentation for a supplier assessment is likely to be required?

A

Where different languages are involved

65
Q

Descrive international payment costs

A

Each payment to another country will incur additional bank transaction fees

66
Q

Who drives important and high-risk decision making?

A

Senior Management

67
Q

What are decision on high-value projects often part of?

A

An established annual strategy, planning and budgeting cycle

68
Q

What happens in senior management meetings?

A

They review progress on plans and review projects being undertaken

69
Q

What may senior management wish to establish for high-risk/high-spend items?

A

Policies - delegation of authority etc. Perhaps with a tiered approach that may require more detail and discussion for these items

70
Q

Why are senior management often required to authorise significant spend?

A

So it follows the early involvement and awareness will provide better awareness and more effective decision-making

71
Q

Name 7 departments that may be involved in high-spend/high-risk decisions

A
  1. Procurement
  2. Engineering
  3. Accounting
  4. Operations/manufacturing
  5. Legal/compliance
  6. Health and safety
  7. Marketing
72
Q

What does cross functional support mean?

A

It is more likely that better information is provided to senior management who will then be less likely to require further departmental confirmations

73
Q

Name 3 benefits of establishing a team approach in whole life asset management

A
  1. It adds to the development of a total-organisation commitment to decision-making and the future.
  2. The collaborative work on a WLAM project helps to break down departmental and management/staff barriers
  3. The originator of the information is the one best placed to add an additional context to any data.

CIPS L4M7 - Whole-life asset management (9 decks)

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