CIPS D3

Question 1

Explain the nature of ‘strategic’ purchases and their likely impacts on the sourcing process.

Answer 1

• The likelihood of mutual dependency and investment between the buyer and the supplier.
• The focus should be on total cost, supply security and competitiveness.
• The need to develop long-term, trust-based, mutually beneficial relationships.
• A rigorous sourcing process involving top management and the wider stakeholder interest in order to ensure sustainable long-term relationships.

Question 2

Explain the term ‘supplier pre-qualification’ and how it might assist a buyers sourcing process.

Answer 2

• ‘Supplier pre-qualification’ is the definition and assessment of criteria for supplier suitability
• Only suppliers meeting the minimum standard/criteria are invited to participate in a sourcing process.
• It facilitates the preparation of an approved supplier list.
• It will be suitable for a specialised type of requirement being considered by the buyer
• It is carried out to pre-screen suppliers to receive an invitation to tender or to quote for a contract.
• It will help to embed qualitative selection criteria in the supplier selection process.

Question 3

Outline FIVE supplier selection criteria that a procurement manager might use when selecting suppliers

Answer 3

 Competence (or capability): having the right resources and expertise – including capabilities in
management, design and innovation.
 Capacity: to meet current and future needs –e.g. volumes the supplier can handle; the
efficiency and sustainability of the supplier’s own supply chain; etc.
 Commitment: to the key values like quality, service, cost management or continuous improvement;
willing to commit to a longer- term relationship
 Control: having systems in place for managing and monitoring resources and risks –e.g. quality,
environmental, financial, etc.
 Cash: capability to ensure sustainable financial stability/health - e.g. managing profitability, cash flow,
assets, debts, cost structures, etc.

Question 4

Explain TWO financial checks that procurement could use when sourcing suppliers.

Answer 4

• Turnover (total revenue), typically over a three-year period to determine whether the supplier is
growing or shrinking; or the value of the contract to the supplier.
• Profitability (highlighting cost efficiency) typically over a three-year period to determine the extent to
which supplier is controlling its costs.
• Liquidity ratios –to determine the extent to which the supplier’s liquid assets can meet its short and
long-term liabilities such as raw materials costs, wages, loan repayments, etc.

Question 5

Explain TWO reasons why it would be important for

a procurement manager to assess a potential supplier’s liquidity and not just its profitability.

Answer 5

 Being profitable does not necessarily mean that a potential supplier has sufficient cash resources to
meet its financial obligations -it could go into liquidation if faced with a large payment to be made.
 Profits may have been used to purchase ‘non-liquid’ assets – e.g. buildings, plant or machinery - which
cannot easily be converted into cash when needed.
 The supplier’s profits might have been committed to shareholders in the form of dividend payments
and therefore not available to finance business requirements.

Question 6

Discuss the advantages and disadvantages of using a tendering (competitive bidding) process

Answer 6

 It promotes competition between suppliers that can improve value for money for the purchaser.
It engages a wide choice of suppliers (particularly if open tendering is used) which may encourage
innovative solutions to requirements.
 Fairness and genuine competition between suppliers.
 Decisions are soundly based on cost and value for money.
____________
 The process may become bureaucratic, extended in terms of time and if the criteria are not correctly
set, may not deliver best value for the buyer.
 Wide competition may discourage some potentially suitable suppliers.
 If prequalification is inadequate, then tendering could create the risks later in the process.
 Overemphasis on the lowest price may not represent the best long-term value.
 Administrative cost on procurement staff.
 Not suitable for a one-off or bespoke type of contract.

Question 7

When carrying out the tender process, it is considered good practice to debrief unsuccessful bidders.
Outline FIVE topics that might be included by in the de-briefing process.

Answer 7

 Cost (e.g. number of bidders offering lower prices): suggesting that unsuccessful supplier’s prices are
too high.
 Schedules and lead times: meaning that the supplier’s schedules and lead times are too long or are
not what the buyer requires.
 Design quality of the supplier’s product will not meet the buyer’s requirements.
 Organisational or administrative weaknesses meaning that the supplier might not be able to meet the buyer’s requirements.
 Insufficient experience in producing the required goods meaning that faults might occur.
 Personnel and management may not operate in ways that are compatible with the buyer’s
organisation.

Question 8

Explain the meaning of the term ‘letter of credit’ in the context of payment mechanisms to international suppliers.

Answer 8

Letters of credit are widely used in international trade and are intended to achieve the following:
 the seller aims to ensure that they will get paid without the need for time consuming and costly
litigation.
 the buyer aims to ensure the payment is not made until the goods have been safely transferred to
their ownership.

Question 9

Describe FOUR potential benefits when sourcing from small businesses rather than larger suppliers

Answer 9

• Innovation capability and ability to adopt and exploit new technologies. This is due to the entrepreneurial and interactive nature of such suppliers
• Competitive pricing due to lower administrative overheads and management costs
• Greater responsiveness and flexibility (due to less bureaucracy, and shorter decision-making process).
• Strong commitment to high service levels - as customer relationships are important due to the value
of the business

Question 10

Explain how ethical issues may affect sourcing from

suppliers

Answer 10

• Macro level – might include issues under Ethical Trade Initiative (ETI) such as globalisation, labour
exploitation, and industrialisation impact on the environment.
• Corporate level – might include policies on stakeholder interaction, CSR, environment and
sustainability, fair trading and labour standards in the supply chain.
• Individual level – might include adherence to a code of ethics in areas such as fairness, transparency,
confidentiality, conflict of interest, etc., within the sourcing/tendering process.

Question 11

Explain FIVE selection criteria that might be used to identify suitable suppliers

Answer 11

• Financial capabilities –the suppliers’ financial stability in terms of profitability and liquidity, including
their creditworthiness in the short and long term.
• Technical capability – the supplier’s technical tools used; their processes and expertise and know how;
the level and adaptability of their human resources; etc
• Price and cost factors – determine if the supplier’s cost and pricing structures are competitive, and
potential to set up longer-term pricing agreements.

Question 12

Explain the terms ‘gross profit percentage’ and ‘operating profit percentage’.

Answer 12

Gross profit percentage and operating profit percentage are both profitability ratios. They measure the extent to which a business has traded profitably.
Gross profit is calculated by deducting the cost of sales (costs of production) from sales revenue. The gross
profit percentage expresses the gross profit as a percentage of sales revenue (turnover). It is calculated as follows: - Gross profit/sales revenue x 100
Operating profit (profit before interest and tax) is calculated by deducting operating expenses (such as
administrative, sales and distribution) from gross profit. The operating profit percentage expresses the
operating profit as a percentage of sales revenue (turnover). It is calculated as follows: -
Operating profit/Sales revenue x 100

Question 13

Describe any FIVE stages of a tender procedure

Answer 13

• Preparation of clear detailed specifications and contract documents - these will assist with analysis
and comparison of tender responses against stated price and non-price criteria
• Decision on whether to use an open or selective/restricted tendering approach- Julie might opt for selective tendering as a relatively prequalified supplier list is available and the requirement is urgent
• Determination of a realistic timetable for the tender process - this should allow sufficient time for
responses whilst meeting Naturally Me’s overall timing aspirations
• Advertisement of the requirement and pre-qualification of suppliers if other criteria must be
considered (apart from the available financial and production criteria)
• Issue of invitation to tender (ITT) and tender documentation (e.g. instructions to tenderers; pricing
document; specification; contract terms and conditions; submission deadlines; etc.)
• Submission of completed tenders or quotes from suppliers-in a secure location

Question 14

Explain FIVE issues that need to be considered by buyers when importing goods.

Answer 14

• Import duties -indirect taxes levied on imports of goods at the point of entry and thus increasing costs
• Trading blocs and Tariff barriers – additional levies on imports from certain markets causing
additional costs
• Need to engage import agents or freight forwarders to process the international requirements.
• Extra lead time - to allow for shipping and customs clearance procedures
• Documentation –elaborate documentation might include import licences; marine insurance and other
shipping documents; inward processing relief (IPR) from import duties if the imports are re-exported
after processing; etc.
• Payment mechanisms – transactions with the supplier/buyer banks to facilitate payment for the
goods via letter of credit or other mechanisms
• Exchange rate issues, currency regulations etc.

Question 15

Describe FOUR sources of information that might be used when assessing the financial stability of new suppliers, before awarding the contracts

Answer 15

 Published financial statements: -the balance sheets, profit and loss account and cash flow will reveal
whether the supplier the profitability and liquidity to meet the contractual obligations.
 Secondary data: - information from business/trade press, or business research agencies like
DataMonitor might reveal trends and developments affecting the supplier, e.g. gaining or losing
contracts; their supply chain experiencing financial difficulties; etc.
 Credit rating companies (e.g. Dun & Bradstreet, Experian, Equifax, etc.): - for a fee will provide
information on the credit status of a supplier and give an indication of their financial stability.
 Inviting the supplier’s financial director to give a presentation on the supplier’s current and predicted
financial position. This would give the the procurement team an opportunity to ask questions and
get some clarifications.

Question 16

Explain the terms ‘Revenue’ and ‘Operating Profit’

Answer 16

 ‘Revenue’ is the money received by the organisation for the goods or services sold over a specified
period. It is the net sales figure after discounts and sales taxation has been deducted. Other terms
with similar meaning as revenue are - sales, turnover, and income.
 ‘Operating Profit’ is the profit achieved after operating expenses have been deducted from gross
profit. Operating expenses are related to administration, sales and distribution, etc. However,
interest and tax will not have been deducted in calculations for operating profit, hence it is
sometimes referred to as profit or earnings ‘before tax and interest’

Question 17

Analyse FOUR legislative, regulatory or organisational requirements that an organisation will need to consider when sourcing from international suppliers

Answer 17

 Documentation relating to imports, such as: bill of lading or airway bill; insurance policy; certificate of
origin; import licence; etc.
 Import duties or tariffs, which are levied on a wide range of goods entering from outside the country
or out the customs union in which the buyers country of operation is a member.
 The use of Incoterms (e.g. EXW, CFR, DDP), which set out the extent of rights and responsibilities of
the supplier and buyer in relation to the movement (ownership transfer) of the goods, e.g. to and
from ports or airports, loading and unloading the goods, etc. Buyers should negotiate the type of
Incoterms into the contract as they impact on the final cost of the purchases.
 Payment mechanisms, which should be agreed depending on the extent of trust between the buyer and its suppliers. The popular method of using the letter of credit which involves documentary undertakings by both banks of the supplier and the buyer to ensure that the supplier will deliver the goods and the buyer will pay for them.

Question 18

Explain THREE possible consequences procurement if it decides to ‘tier’ their supply chain.

Answer 18

• Need to involve key stakeholders – top management, users, etc. – in the crucial and strategic exercise of selecting and contracting first tier suppliers.
• Allocation of considerable resources and time to comprehensive prequalification, appraisal, selection and negotiation processes to develop collaborative solutions and agreements.
• With fewer suppliers to manage, buyers can focus on managing and improving strategic relationships
with the 1st tier suppliers to ensure that they manage their own supply chains effectively.
• Need to minimise risk by ‘drilling down’ through the tiers by appraising and monitoring policies,
systems and performances to ensure that the lower level supply chains are robust (e.g. in connection
with quality, ethical or labour standards).

Question 19

Explain TWO benefits of pre-qualifying potential suppliers before engaging them in a tender process.

Answer 19

• An established list of pre-qualified suppliers reduces the amount of investigations needed for
individual tenders and purchases.
• Pre-qualification of suppliers should reduce the time and cost of tendering in the longer term – it
reduces the number of stages in the future competitive tender processes.
• The pre-qualification process provides an opportunity for procurement and technical specialists to work together and provide a list of pre-assessed and qualified suppliers.
• Pre-qualification is also an important opportunity for procurement to embed qualitative criteria (such as CSR or ethical aspects; innovation; etc.) in the supplier selection process without compromising the more
quantitative criteria traditionally applied at the contract award stage.

Question 20

Describe FOUR criteria that may be used to pre-qualify potential suppliers.

Answer 20

• Carters 10 Cs - competence or capability, capacity, commitment, control systems, cash, consistency,
cost, compatibility, compliance and communication.
• FACE 2 FACE - Fixed Assets or Financial Stability; Ability to deliver or Ability work with; Cost of
acquisition or Commitment to quality; Efficiency or Environmental aspects.
• Lysons and Farrington’s Eight perspectives of supplier selection – Financial stability; Production
Capacity; Human Resources; Quality; Performance; Environmental & Ethics; IT development;
Organisation Structure.
• Other generic criteria/approaches might include – aspects of 5 rights; supply chains/networks;
sustainability, technical capabilities, human resources; geographical location; etc.

Question 21

Explain FIVE benefits for using an e-tendering compared to a paper based tendering system.

Answer 21

• Consistency: - of tendering procedures and embed tender best practice in the organisation. This will help promote procurement centres of excellence that define and apply standardised processes documents and contract terms.
• Process efficiencies: The reduced tender cycle times due to less labour-intensive repetitive tasks and
paperwork. This comes through, for instance automation of imminent tender alerts; contract notice creation;
documentation preparation/distribution (cut/paste e.g. expressions of interest, ITT, contract terms, etc.);
opening procedures; evaluation/scoring; supplier enquiries and contract award notifications.
• Security: Bids are securely emailed/registered to the e-tendering system’s ‘electronic vault’ and buyers can
monitor/manage the process through a ‘front end’ web function, enabling them to respond to any queries.
• Transparency and fairness: All suppliers receive the same information and tracking, and they are evaluated
to the same (automatically enforced) criteria and time-scales. This is due to the in-built security features.
• Cost reduction and sustainability: Electronic processes promote paperless functions which help to reduce
the financial and environmental cost relating to postage and stationery and storage/office space.

Question 22

Describe THREE advantages of a multiple sourcing approach, compared with single sourcing.

Answer 22

• Mitigation of supply risk in connection with shortages, disruptions, unforeseen peaks in demand, or
supplier failure. In such circumstances a buyer will have a range of approved alternative suppliers
• If the changing business environment affects the compatibility or competitiveness of some suppliers,
buyers can be more opportunistic in exploiting the best available price and trading terms.
• Buyers should get better value for money by keeping the supplier base competitive – making each supplier
know that it is competing for contracts with a number of other suppliers.

Question 23

Describe TWO disadvantages of a multiple sourcing approach, compared with single sourcing.

Answer 23

• High procurement costs in connection with the transactions and administration of many smaller
orders processed through a range of suppliers.
• Fewer opportunities to develop value adding strategic/collaborative relationships due to the
uncertainties created by competition among suppliers.
• It can lead to a wasteful proliferation of mediocre vendors on the supplier data base and an
increasing stock variety with some items being potentially inexact in specification.
• The quantities allocated to various suppliers might be too small to attract discounts, and could
potentially relegate the buyers position in the Supplier Preferencing Matrix.
• In some situations, there may only be one supplier making it impossible to multisource

Question 24

Explain FOUR criteria that procurement might use in its contract award process.

Answer 24

• Ability to conform to specifications –the HR and finance e-systems for example, would clearly defined
performance specifications against which the suppliers would be evaluated for contract award.
• Best value or ‘most economically advantageous tender’ (MEAT) –this criterion would be a combination of such attributes as - quality, delivery lead times, technical merit, risk sharing, CSR, etc.
• Total lifecycle cost or the total cost of ownership- this is important for long term capital purchases as it
considers a range costs involved in -procurement; finance; installation; maintenance; and even disposal.
• Added-value solutions - Proc might award contracts only to suppliers who are innovative and can offer
added-value solutions – including higher levels of service (e.g. in support, maintenance, upgrades, etc.)
• Financial stability - ZSL will consider those suppliers that are profitable, have sufficient liquidity to settle
their current liabilities and have the financial capacity for the contract size.
• Other criteria –as contract award is a stage within the wider sourcing context, the typical selection criteria
(from 10Cs, Face2Face, 5 Rights, etc.) are admissible if explained in the context of the question.

Question 25

Outline FOUR sources of information that a procurement team might use to review the financial performance of potential suppliers.

Answer 25

• Published financial statements- i.e. profit and loss account, balance sheet and cash flow statement –
which will provide a picture of the supplier’s profitability and liquidity.
• Business or trade press may provide information about trends and developments affecting potential
suppliers –e.g. gaining or losing contracts or financial difficulties within their supply chains.
• Credit rating companies, such as Dunn and Bradstreet, which for a fee, will provide information on the credit status of a supplier and give an indication of their financial stability
• Presentation from the supplier’s financial director –will give information on the supplier’s financial position, and provide an opportunity for ZSL’s procurement team to ask relevant questions.
• Networking with other buyers who use the same supplier, gives an opportunity to gain information
from them about past or present performance.

Question 26

Describe TWO short-term liquidity ratios that the procurement team might use to establish whether a potential supplier is financially stable.

Answer 26

The current ratio is calculated by the formula: current assets (stock, debtors and cash) divided by the
current liabilities (creditors and short term loans). This ratio should be greater than 1:1 (ideally 2:1), indicating
that a potential supplier has current assets that exceed current liabilities. A ratio less than 1:1 would indicate
financial instability since the supplier’s current assets cannot cover its current liabilities.

The acid test ratio is similar, but excludes stock from the calculation, because stock may be difficult to
realise and may not achieve its balance sheet value. This ratio should be at least 1:1, indicating that a
potential supplier has sufficient cash and debtors to cover its current liabilities. A lower ratio than 1:1 would
therefore indicate financial instability.

Question 27

Suggest and justify FOUR stages that procurement might include in its tendering process for the procurement of the new specially designed boat

Answer 27

• Preparing detailed specifications, draft contract documents, including all the criteria to be used in
facilitating accurate costing and comparison.
• Deciding on the type of tender - open or selective tendering - if not already covered in the policy.
• Determining a realistic timetable, providing reasonable time for the entire tendering process.
• Advertising the requirement, tender procedures to be followed and timetables for expressions of
interest or submission of bids
• Sending out Pre-Qualification Questionnaires (in selective tendering) to supplier that have intimated
an expressions of interest - the timetable for return of PQQ must be clear.
• Issuing Invitation to Tender (ITT) documents to those bidders responding to the advertisement – all
these documents in the ITT for all suppliers must be identical.
• Receiving completed tenders from potential suppliers, as specified and within the deadline.
• Opening of the tenders on the appointed date, in the presence of appointed officers
• Logging of received tenders, with the key details to facilitate analysis and comparison
• Analysing each tender, according to the stated criteria, with a view to selecting the best offer.
• Post-tender clarification, verification of supplier information and/or negotiation, where required
• Award of the contract and notification of the award
• De-briefing unsuccessful tenderers to enable them to improve their competitiveness in future bid

Question 28

Propose FOUR requirements that might be included in procurement’s code of conduct.

Answer 28

• Not to exploit the commercially weaker lower tier suppliers, or their labour forces. They need support by
the paying fair prices and wages; and waiving of some onerous compliance or investment requirements.
• Not to degrade or pollute environments, or exhaust resources in developing economies, even though this
may be permissible under local environmental protection standard
• Minimise the environmental impact of its operations, by reducing transport miles, fuel usage and carbon
emissions, or its carbon footprint
• Support domestic businesses, especially SME’s, for economic, sustainability and public relations
purposes, especially in times of economic recession and unemployment

Question 29

Using examples to illustrate, explain the purpose of Incoterms.

Answer 29

The purpose of Incoterms is to specify and clarify the obligations of the buyer and seller such as:
• Where delivery should be made
• Who is responsible for the cost of transport; import duties; goods in transit insurance.
• What level of insurance is required?
• Which party raises particular documents.
Incoterms are structured in order of increasing responsibility or risk for the exporter/supplier at each stage of the transaction. At one end is the EXW terms whereby the supplier’s responsibility transfers to the buyer as soon as the goods are made ready at the suppliers premises as agreed, it is the buyer’s responsibility to collect and transport them to destination. On the other end of the incoterms is DDP terms where the supplier’s responsibility does not transfer until the good are delivered to the final agreed buyer’s destination.

Question 30

Describe FOUR elements that might be included in a sourcing plan for procurement

Answer 30

 Review of the current supply situation and the organisation’s requirements and determine any
apparent issues or risks to address, e.g. the viability of the current supplier base in relation to Zingle’s
requirements. Zingle’s flavours are currently single-sourced and it may be worthwhile to interrogate
or review this strategy.
 Research the supply market situation (structure, composition, competition, etc.) to identify potential
suppliers and determine a suitable sourcing approach and the kind of business relationships to adopt,
especially for strategic requirements like orange flavourings.
 Generate sourcing options depending on the nature of the product and the market. Such options
might include whether Zingle should source through negotiations or tendering (and what type), locally
or internationally; from single or multiple sources; outsourcing or subcontracting; etc.
 Develop supplier selection, award and appraisal process to ensure the suitability and competence of
the potential suppliers. For this process, Zingle will need to define appropriate selection and award
criteria using such approaches as 10Cs thus to deliver the required technical and commercial result

Question 31

Explain the terms ‘Revenue’ and ‘Operating Profit’

Answer 31

 ‘Revenue’ is the money received by the organisation for the goods or services sold over a specified
period. It is the net sales figure after discounts and sales taxation has been deducted. Other terms
with similar meaning as revenue are - sales, turnover, and income.
 ‘Operating Profit’ is the profit achieved after operating expenses have been deducted from gross
profit. Operating expenses are related to administration, sales and distribution, etc. However,
interest and tax will not have been deducted in calculations for operating profit, hence it is
sometimes referred to as profit or earnings ‘before tax and interest’.

Question 32

Explain FOUR areas that an organisation might use to

monitor the performance of its suppliers

Answer 32

• Quality- e.g. the reject, error or wastage rates of goods delivered to its restaurants; the number of
customer complaints received; adherence to quality standards, etc. In terms of recruitment services,
the may assess the agency’s conformance to the vacancy specification, effective skills match of
recruits, and compliance with the regulatory requirements
• Delivery – e.g. the frequency of late, incorrect or incomplete deliveries; the percentage of on time in
full (OTIF) deliveries; In terms of recruitments services they may assess the agency’s ability to provide
shortlisted candidates by the specified date
• Service and relationships – e.g. the competence and co-operation of the supplier’s account manager,
or promptness in dealing with queries and problems, adherence to after-sales service.
• Financial stability - the supplier’s ability to meet financial commitments and claims; to maintain
quality and satisfy delivery expectations

Question 33

Identify and justify TWO technical criteria and TWO commercial criteria that could be used by Grocery Grande when considering suppliers during the
selection process.

Answer 33

Examples of technical criteria that could be applied include:
• Conformance to specification – includes best solution to the specified requirement for performance,
output or function, e.g. Grocery Grande may require the recruitment agencies to comply to
employment law in the various operational locations.
• Achievement of specified performance – e.g. KPIs for advertising vacancies, processing applications,
response times, applicants’ calibre, vacancy fill rate, etc.
• Quality/track record and reliability – including accreditations/certifications like ISO9001, references,
affiliations or membership to a professional body.
• Innovation – including innovative design/product and support, e.g. the creative digital marketing
campaign targeted at recent graduates, etc.

Examples of commercial criteria that could be applied include:
• Financial stability – includes the supplier’s customer base, total revenue, profitability, assets,
liabilities, etc. All these have an effect on pricing, performance, and overall sustainability of the
business relationships.
• Commercial cost and value considerations – value for money considerations including best solution or
service package without extra cost or unnecessary features/benefits.
• Resource - whether or not the supplier has sufficient resources and resolves to provide the service.
• Supply of service - could also include the initial purchase price, volume capability, admin costs,
efficiency of systems and processes.
• Ethical and environmental requirements

Question 34

Evaluate the risks if the buyer does not assess the financial stability of the potential suppliers before the award of a contract

Answer 34

• The supplier may not be able to fulfil the contract
• The supplier may have to cut costs, with an impact on the quality of the end product
• The supplier may not be able to meet delivery dates, for example through an inability to pay staff
overtime when there is a spike in demand.
• The supplier may go into administration and cease trading

Question 35

Describe TWO financial ratios that might be used to establish the liquidity of the suppliers

Answer 35

The current ratio is calculated by the formula, current assets divided by current liabilities. Current assets
typically consist of stock, debtors and cash, while current liabilities are creditors and short term bank loans, such as an overdraft. The ideal current ratio should be about 2:1 to signify sound liquidity levels.

The acid test ratio is calculated by the formula, current assets – stock divided by current liabilities. The
rationale for excluding stock is that stock may be difficult to realise in the short term and that it may not be sold for the value shown in the balance sheet. This ratio is generally expected to be 1.0:1 or higher.

Gearing is a percentage long term liquidity ratio calculated by the formula - long term debt divided by net worth and multiplying by 100

Question 36

Outline THREE benefits of using an e-auction system as a procurement tool

Answer 36

• Efficient administration- e.g. elimination of cumbersome and time consuming manual processes
linked to prequalification, tendering and contracting for Grocery Grande’s multiple locations.
• Consistency of procedures and embed best practice, e.g. defining and applying standardised
processes documents and contract terms.
• Reduction in acquisition lead time, Nina has only 3 months to set up a contract before the graduate
recruitment process begins.
• Cost reduction and sustainability: Electronic processes promote paperless functions which help to
reduce the financial and environmental cost relating to stationery and storage/office space.
• Transparency and fairness: All suppliers receive the same information and tracking, and they are
evaluated to the same (automatically enforced) criteria and automated time-scales.

Question 37

Suggest TWO potential disadvantages of introducing an e-auction system

Answer 37

• Some suitable supplier might be limited by lack technical know-how or equipment to bid
electronically
• Issues around security of commercial information and intellectual property might make some
suppliers unwilling to take part
• Competitive nature of e-auctions makes the process adversarial or ‘win-lose’ in approach and can
potentially damage long term relations between buyers and suppliers.

Question 38

Explain TWO reasons why compliance with the procurement policy is important for an organization

Answer 38

• The procurement policy defines the requirements enabling procurement staff to act professionally,
consistently and appropriately while deterring maverick tendencies among individual staff members.
• Compliance to the procurement policy provides a transparent audit trail, this can be particularly
useful if the organisation is challenged or adversely affected by negative press.
• Fair competition can be demonstrated, which will be an important factor for the organisation and
other stakeholders. This also creates a position of strength and leverage for the buying organisation.

Question 39

Explain, using examples, the ethical issues which buyers should consider when sourcing from an international supplier

Answer 39

• The supplier’s working practices with regard to forced labour. The organisation could be viewed as
endorsing this kind of practice and thus lead to reputational/brand damage.
• A supplier with an unacceptable Health, Safety and Environmental record, including long working
hours, is a reputational risk for the buyer.
• Evidence of bribery corruption within the supply chain could also damage reputation.
• Procurement might use the Dow Jones Watch or other available tools to identify red flags or
warning signals for companies that might be ethically exposed.

Question 40

Describe FIVE criteria that buyers may use to monitor and measure the performance of their suppliers.

Answer 40

 Price: - this would include basic purchase price or whole life cost comparisons and percentage cost
reductions. Emphasis on value for money is a key focus in public sector environments.
 Quality/Compliance: - this might mean reject, error or wastage rates of goods delivered; the number of
complaints received from end users; adherence to quality; etc. There could be a requirement for
compliance with regulatory standards on environmental; CSR, etc. (e.g. emissions of the purchased
vehicles).
 Delivery: - might refer to the frequency of late, incorrect or incomplete deliveries; the percentage of on
time in full (OTIF) deliveries; etc. considering the criticality of many of the items procured.
 Service/relationships: - e.g. the competence and co-operation of the supplier’s account manager;
promptness in dealing with queries and problems; adherence to the terms of after-sales service.
 Financial stability: - the supplier’s ability to meet financial commitments and claims, to maintain quality
and satisfy delivery requirements of Crown Agent’s clients.

Question 41

Outline FOUR appropriate selection criteria that procurement could apply when investigating new sources of supply and selecting new suppliers.

Answer 41

 Financial stability: - would include the supplier’s profitability, liquidity and cost structure to determine its
ability to fulfil the contract and maintain continuity of supply that is critical to a buyer
 Technical capability: - establishing whether the supplier can produce or deliver the required inputs or
services. This might also include review of the supplier’s capabilities in innovation, design and JIT.
 Production capacity: - includes the business volume the supplier is actually and potentially capable of
handling (i.e. existing production capacity, how much is already committed and the potential to increase
capacity in the future if required).
 Systems capabilities: - whether the supplier’s systems and procedures are compatible with those of the buyer, or its ability and willingness to adapt to them. It might also involve considering the supplier’s state of IT development and the potential for integration with those of Crown Agents.
 Quality and quality assurance: - whether the supplier has quality systems (e.g. QA, TQM, etc.) to mitigate
against the risk of quality failure.

Question 42

Outline FOUR sources of information that might be used to investigate the financial liquidity of potential suppliers.

Answer 42

 Published financial statements: -the balance sheets, profit and loss account and cash flow will reveal whether the supplier the profitability and liquidity to meet the contractual obligations.
 Secondary data: - information from business/trade press might trends and developments affecting
the supplier, e.g. gaining or losing contracts; their supply chain experiencing financial difficulties; etc.
 Credit rating companies (E.g. Dun & Bradstreet and Data Monitor): - for a fee will provide information
on the credit status of a supplier and give an indication of their financial stability.
 Inviting the supplier’s financial director to give a presentation on the supplier’s current and predicted
financial position. This would give the Crown Agents procurement team an opportunity to ask
questions and get some clarifications.
 Networking: - with other buyers who use the same supplier, e.g. at CIPS branch events. Public sector
buyers as those of Crown Agents will usually be prepared to share information.

Question 43

Assess the potential benefits for an organisation in using electronic sourcing in its global operation.

Answer 43

 Reduced costs: - through increased process efficiencies, reduced sourcing costs, e.g. eliminating
cumbersome manual processes, promoting less costly paperless environment.
 Reduced sourcing cycle times: - reduction in acquisition lead time, due to process efficiencies enhanced accuracy.
 Allows easy access: - to the wider range of Crown Agents’ global operations without concerns for time
zone limitations.
 Best practice development: - consistent, transparent and fair procedures e.g. standardised documents, all
suppliers receiving same automated communication, users able to participate in sourcing without
compromising good practice or sound procurement disciplines, etc.
 Improved training and efficiency: - e-sourcing applications can be used as offline training tools to give
employees hands-on experience without jeopardising the company’s actual data.
 Strategic Focus: - allows procurement professionals to focus on value-added and strategic activities e.g.
screening, relationship management and development of suppliers.

Question 44

Explain TWO types of competitive tendering might be used by procurement

Answer 44

 Open tendering: - it is open to any potential bidder, following a widely advertised invitation to tender. All
bids are then evaluated against the criteria set out in the ITT and associated tender documents. The
contract is then awarded on relevant criteria which would have been determined by procurement

 Selective or restrictive tendering: the participating bidders will have been pre-qualified on the basis of
criteria predetermined by the buyer. A relatively small number of suppliers, typically three to ten, are
short listed and invited to tender

 Restricted open tendering: - which involves inviting potential suppliers to compete for a contract on an
open basis, but the tender ‘pool’ is partly pre-qualified by restricting the advertising of the tender to
selective media, for example technical journals or trade/industry web portals

 Negotiated procedures: - this approach is included in the EU tendering methods, but it may be used more
generally. It involves the selection of a small number of suppliers to enter into direct negotiations with the
buyer. At the end of the negotiation process, suppliers submit their best and final offers, which are then
evaluated, to select the best value offer.

Question 45

Describe THREE ways that buyer might manage currency and exchange rate risks.

Answer 45

• Getting the supplier to quote prices in PBL’s own domestic currency - might be a tough negotiation, unless the purchaser has greater leverage or can offer concessions in exchange.
• Negotiate prices on an estimated rate that will apply at payment time - if fluctuations are not extreme –
perhaps with a contract proviso for renegotiation if the exchange rate fluctuates beyond specified tolerances.
• Agree to pay for the goods at the time of contract (i.e. at today’s known exchange rate) before delivery/due
date to exploit a positive exchange rate – an example of a technique known as ‘leading’. The reverse is
‘lagging’ - making a payment after the due to exploit exchange rate improvements at the expense of the
supplier (there might be ethical, reputational and relationship risks).
• Use available tools of currency management, such as a forward exchange contract, which enables the
importer to ‘hedge’ the risk by contracting now to purchase the overseas currency at a stated future date, at a rate of exchange agreed now.

Question 46

(i) Outline THREE advantages of supplier partnering from the buyer’s viewpoint.
(ii) Outline TWO disadvantages of supplier partnering from the buyer’s viewpoint.

Answer 46

(i) Advantages to WEL of supplier partnering:
• Greater stability of supply and prices
• Sharing of risk and investment
• Better supplier motivation and responsiveness
• Cost savings from a reduced supplier base and collaborative cost reduction
• Access to the supplier’s technology and expertise • Joint planning and information sharing
• Enables long long-term planning and relationship management

(ii) Disadvantages to WEL of supplier partnering:
• Risk of complacency -affecting cost, quality, etc.
• Less flexibility to change suppliers when needed -e.g. in supply market changes/opportunities
• Possible risk to confidentiality or intellectual property
• Getting locked into a relationship with an incompatible/inflexible supplier
• There might be costs of relationship management
• Mutual dependency may create loss of flexibility and control

Question 47

Explain FOUR tools that procurement could use to analyse the supply markets of its
suppliers.

Answer 47

• Environmental audits and PESTLE analysis: this identifies external environmental factors affecting the
specific supply market and classifies them into -Political, Economic, Socio-cultural, Technical, Legal
and Environmental.
• Industry analysis: examines the structure of the industry identifying ‘key players’ and the nature and
intensity of competition. Porter’s Five Forces model is ideal for this analysis.
• SWOT analysis and/or risk analysis - identifies the implications of supply market factors for the
supplier in terms of its -Strengths and Weaknesses (internal factors), then Opportunities and Threats
(external factors).
• Competitor analysis: WEL may monitor and analyse the actions of its key competitors and their
supply chains – and how this activity may impact on WEL’s operations and the required response.
• Critical success factor analysis: examining what objectives to be achieved to secure competitive
advantage for a supply chain in a particular market

Question 48

A procurement manager should be aware of potential benefits of international sourcing such as lower cost. However, international sourcing may have ethics related issues. Explain TWO such ethics-related issues.

Answer 48

• Not to exploit suppliers or supplier labour forces. WEL must pay fair or adequate (Fair-Trade) prices
and/or not impose onerous compliance or investment burdens or risks on these suppliers.
• WEL must support the raising of labour standards and working conditions particularly in low-cost
labour countries (e.g. following the ethical trading Initiative).
• Not to degrade or pollute environments or exhaust resources in developing economies even though
this might be permissible in some countries with low local environmental protection standards.
• Must pursue environmental protection initiatives by setting targets for such things as targets for
carbon emissions, reducing transport miles and fuel usage.
• Protect its reputation, image and brand by buying ethically sourced and produced goods – e.g. fairtrade products
• Support domestic businesses for economic and social sustainability and public relations benefits.