Context of procurement and supply

Question 1

Outline FIVE differences between purchasing goods and purchasing services

Answer 1

• Goods are tangible, services are intangible: therefore, services cannot be measured, weighed
or otherwise inspected: an SLA is usually needed.
• Services cannot be separated from their supplier: goods can be delivered and stored before
they are required, whereas, services are produced and consumed simultaneously.
• Heterogeneity: goods are usually uniform in nature while services are unique at each delivery
because the personnel and circumstances are always different, making them difficult to
‘standardise’.
• Services ‘perish’ immediately on delivery whereas goods can be stored until required. Planning
ahead is required so that the service is available when needed.
• Products are easier to specify, being tangible. Services are harder to prescribe because of their
intangible and heterogeneous nature.
• Ownership: services have no transfer of ownership making it difficult to define when a service
has been fulfilled and when risk and liability have passed from seller to buyer.
• Services require a higher level of human involvement and interaction especially services carried
out for people (e.g. travel services). Quality will depend, to some extent, on the behaviour of
the recipient as well as the service provider.
• Goods are usually purchased for immediate use whereas services may be purchased for long
periods of time.

Question 2

Name the 5 rights of procurement.

Answer 2

The ‘5 rights of procurement’ are quality, quantity, price, time and place

Question 3

Explain 3 rights of procurement.

Answer 3

Quality: goods which are of satisfactory quality and fit for their intended purpose e.g.
ensuring an accurate specification of the requirement and its quality standards.
• Quantity: sufficient to meet demand and maintain service levels while minimizing stock holding e.g. by ensuring that there is accurate demand forecasting and efficient inventory management.
• Place: goods delivered to the appropriate delivery point, packaged and transported so as to
secure their safe arrival in good condition: e.g. by including transport instructions
including packaging requirements as part of purchase orders.

Question 4

Explain THREE circumstances in which a competitive tendering exercise might not be the best
approach to making a purchase.

Answer 4

• Urgency: tendering can take a long time and there may not be enough time to perform it
correctly. If potential suppliers rush to complete a quotation, it might lack accuracy or might be
‘overpriced’ to cover unforeseen eventualities.
• Commercial confidentiality or national security (e.g. military organisations): tendering
confidentiality might be required. This would be difficult to achieve due to the ‘open’ nature of
most tendering processes and the need for many potential suppliers to be involved.
• Value of the purchase: if this is insufficient to justify the costs and time of tendering, negotiating
with one supplier might be better.
• Production costs cannot be measured accurately: an issue for potential suppliers but buyers
should be aware of typical production processes and if suppliers cannot estimate production
costs, the buyer should consider alternative ways of supplier selection.
• Price is not the only criterion for supplier selection and contract award. Service and the
supplier’s ability and willingness to contribute to cost reduction and design improvement might
also be important and tendering might not take account of it successfully.
• Tooling or set-up costs are major factors: these can add considerably to costs but here it could
be very difficult to make comparisons between different potential suppliers.
• Intellectual Property Rights and monopoly: these might prevent meaningful competition
because there is only one supplier. Candidates might explore how buyers can escape from
monopoly situations by e.g. avoiding branded goods, and seeking generic solutions based on
output/outcome specifications

Question 5

Describe THREE e-sourcing tools and their use in procurement and supply.

Answer 5

• E-catalogues: these can be viewed online or downloaded by purchasers. This can speed up the
location of potential suppliers as well as suitable products or services.
• Supplier portals and market exchanges: sites where multiple buyers/sellers share information
about requirements and offerings. Again, this can speed up the process of supplier selection.
• E-tendering: involves using e-RFQs and specifications posted online or e-mailed to potential
suppliers. Bids can be received and evaluated electronically, speeding up tendering and sourcing
considerably.

Question 6

Explain the role of a shared services unit (SSU).

Answer 6

SSUs reflect a desire to centralise and share services.
The shared service provider becomes a dedicated provider of services such as; finance, HR, IT
and procurement which continue to be provided internally. An SSU manages costs and quality SLAs to demonstrate value for money

Question 7

Details some benefits of a shared services unit.

Answer 7

• cost effective internal service;
• liaison with its customers;
• anticipating future demand;
• employing resources and providing higher levels of service more cost effectively than if they
were provided by a department or an external porvider

Question 8

Compare and contrast a private sector company with a public sector organisation in ownership and control.

Answer 8

Ownership and control: by individuals in the private sector – owners who have provided the
finance and manage the business or, in a plc, appointed directors. Shareholders may vote to
remove or elect directors.
Public sector organisations undertake a public service. They are publicly owned to serve the
public through a political purpose and the general benefit of society.

Question 9

Compare and contrast a private sector company with a public sector organisation in sources of finance.

Answer 9

Sources of finance: in the private sector usually from owners or, in a plc, from shareholders
investing money in expectation of financial reward. Other sources might include: bank loans or
overdraft facilities secured against assets or investment from venture capitalists in exchange
for a share of the business and expected returns. Additionally, revenue from selling goods or
services would be a source of finance.
Public sector organisations are funded by the taxpayer and include: company taxation, personal
taxation, specific duty or duties on (e.g.) imported goods, fines resulting from criminal activity,
fees and ancillary charges

Question 10

Compare and contrast a private sector company with a public sector organisation in legal and regulatory environments.

Answer 10

Legal and regulatory environments: In the private sector, plcs are regulated to offer protection
to consumers, to offer protection within a market, to maintain competitive markets and
prevent the development of monopolies, and to maintain national interests and public welfare.
Regulation is by statutes and rules imposed by regulatory bodies such as the Office of Fair
Trading.
The regulatory environment of the public sector is similar in many ways but there is a difference
because regulators are not regulating openly competitive commercial markets. Public sector
regulation exists to protect national interests and standards. Organisations in the UK public
sector have to follow EU procurement directives.

Question 11

Compare and contrast a private sector company with a public sector organisation in organizational objectives.

Answer 11

Organisational objectives: typically profit in the private sector. However, there are also potential
objectives such as the organisation’s survival in highly competitive markets and growth of sales
and/or market share. Others might relate to enhancing the organisation’s reputation, making its
brand more well-known, new product development and increasing the return to shareholders.
The public sector provides public services established by the government. The objective here is
to provide a service fulfilling economic and social goals.

Question 12

Compare and contrast a private sector company with a public sector organisation in Importance of corporate social responsibility.

Answer 12

Importance of corporate social responsibility: difference between the sectors is increasingly
less as CSR is becoming, an essential element of corporate governance. Profit motive and need
to satisfy shareholders’ financial expectations might suggest that the private sector is slower to
engage with CSR pointing to the treatment of suppliers and the use of buyer power to influence
suppliers’ behaviour.
The public sector is usually better placed to influence /adopt CSR. Additionally there is the
impact of EU Procurement Directives on CSR issues such as sustainability and the environment.

Question 13

Explain TWO ways in which ‘procurement’ differs from ‘purchasing’

Answer 13

 Procurement is a wider, less limited term than purchasing. It can be defined as ‘the process of
obtaining goods or services in any way, including purchasing, hiring or renting, leasing and borrowing’.
So, purchasing is part of the procurement process.
 Procurement embraces a broader process than purchasing. A purchase is sometimes described in
terms of the ‘purchase-to-pay’ cycle, whereas procurement includes activities prior to and after
purchasing.
 Procurement reflects a more proactive, relational, strategic and integrated role. Purchasing, on the
other hand is traditionally reactive, tactical and non-relational.

Question 14

Outline FIVE ways in which improving the quality of a product can add value
for an organisation

Answer 14

 Improved quality can add value by reducing the need for appraisal and prevention activities, which
will save time and money.
 Improved quality will mean that the risk of failure is reduced. This should lead to a reduction in losses
incurred due to poor quality products reaching the consumer.
 Improved quality will result in fewer goods being rejected or having to be re-worked, which will reduce costs for the organisation.
 Improved quality should improve brand image, resulting in more customers, increased revenue and
profits, which have the effect of adding value.
 Similarly, if an improvement in the quality of the product has improved the brand image, customers
are more likely to be loyal, resulting again in higher revenue and profits.
 Improved quality should mean that quality control measures can be reduced, thereby saving costs

Question 15

Explain THREE ways in which electronic systems can be used in the sourcing
process.

Answer 15

 E-requisitioning to suppliers for goods and services required.
 E-catalogues, published by suppliers.
 E-sourcing, the overall processing encompassing specifications, RFQ’s and contract development.
 Capturing supplier performance data.
 The use of e-mails, extranet or intranet.

Question 16

Describe FOUR ways in which added value may be created for a buying
organisation through an effective sourcing process.

Answer 16

 Suppliers are motivated and are prepared to work with the buying organisation to reduce costs and
add value.
 Suppliers are likely to want to share innovative approaches to add value.
 Suppliers are more likely to deliver products and services without defects, which reduces the costs of
rectification.
 Suppliers may add value by sharing development costs and providing co-investment.
 Suppliers are more likely to reduce lost time by providing timely tender bids, documentation and
deliveries.
 Suppliers are more likely to reduce wastage and add value by helping to identify unnecessary
processes and overstocking.

Question 17

(a) Describe the roles typically undertaken within an organisation by:
(i) The local procurement teams
(ii) The central procurement team.

Answer 17

 The roles of a local procurement team might have included sourcing small order items, sourcing emergency items to avoid
disruption to production, sourcing from local suppliers and sourcing items used only by the local division.
The roles of a central procurement team might have been described in terms of determining procurement
and supply chain policies, preparing standard specifications, negotiating bulk contracts, procurement research and procuring capital assets.

Question 18

Describe THREE possible hybrid structures for a procurement or supply chain
function

Answer 18

 CLAN (Centre Led Action Network), which is a relatively decentralised model.
 SCAN (Strategically Controlled Action Network), which is a relatively centralised model.
 A Lead Buyer approach, which is a way by which responsibilities can be devolved in a CLAN.
 A Business Partnering approach, which is one where a member of a procurement team works with a
user department, representing the procurement function.
 A consortium structure, where a group of separate organisations combine together to procure goods
and services for mutual benefit.
 A shared services approach, which encompasses those support functions that are used by many
different departments within an organisation, for example IT and HR.
 An outsourcing approach, whereby an organisation contracts with a third party organisation to carry
out its procurement function.

Question 19

Describe THREE objectives of public sector organisations.

Answer 19

 to deliver essential public services, such as education, healthcare and housing, which the private
sector might not otherwise provide
 to encourage national and community development, by developing skills, stimulating economic
activity and employment and developing technology and infrastructure
 to pursue socio-economic goals, such as to support small and minority owned businesses and to
promote legislation for minimum standards of human, civil and labour rights
 to achieve value for money, as the public sector is accountable to taxpayers

Question 20

Explain FOUR ways in which regulation might impact on public sector procurement.

Answer 20

 To ensure that bought in materials, goods and services comply with defined public standards and
specifications.
 To ensure that all SC operations are compliant with law, regulation and standards in areas such as health and safety, environmental sustainability, employment rights, data protection and FOI
 To ensure that all procurement exercises are compliant with public policies, standing orders and statutory procedures - with the general aim of securing comp supply, VFM and ethical procurement
 There is a high requirement for accountability, so that audit trails must be maintained.
 Procurement in the public sector must be based on value for money, because taxpayers’ money is
being used.
 The tendering process is more likely to be more bureaucratic and time consuming, because of
regulations such as EU Procurement Directives.

Question 21

Explain, with examples, FIVE benefits of a supply chain management approach to
procurement.

Answer 21

• Reduced costs by eliminating waste and implementing cost reduction programmes throughout the
supply chain. For example, this may involve eliminating activities that don’t add value
• Improved responsiveness to customers’ requirements by emphasising the continuous flow of value
towards the end customer
• Access to complementary resources and capabilities, such as joint investment in research and
development and the sharing of technology and ideas
• Enhanced product and service quality through collaborative quality management, continuous
improvement programmes and enhanced supplier motivation
• Improved communication through increased information sharing and the integration of systems; this
should help to improve planning and coordination
• Sharing demand forecasting and planning information enables suppliers to produce only what is
required, when it is required; this would reduce inventory and the associated costs
• Faster lead times for product development and delivery means that new and modified products can
be offered in response to changing customer demand (agile supply)

Question 22

Describe FIVE sequential stages of a typical tendering process

Answer 22

• An evaluation of the suitability of tendering as a procurement methodology, as compared to other
methods; different forms of tendering, such as selective or open, might have been considered
• Identification of the need, which might be through a bill of materials or requisition
• The preparation of detailed specifications, to form part of the tender documents; different types of
specification, such as performance or conformance, might have been considered
• Determining a realistic timetable for the tender process, allowing a reasonable time for responses at
each stage
• The issue of the invitation to tender, accompanied by specifications; in the case of selective tendering,
this would be by means of an invitation to bid, while in the case of open tendering, it would be by
means of a public advertisement
• The submission of completed tenders or bids by potential suppliers, within the specified deadlines
• Opening of tenders on the appointed date, while tenders received after this date should be returned
unopened; the tenders received should be logged, with the main details listed on an analysis sheet
• Analysis of each tender, against the stated criteria, with a view to selecting the best offer; this will usually be on the basis of the lowest price or the most economically advantageous tender (MEAT)
• Award of the contract to the successful bidder and advertisement or notification of the award
• De-briefing unsuccessful tenderers, to enable them to improve their competitiveness in future bids

Question 23

Define the term ‘Corporate Governance’.

Answer 23

The rules, policies, processes and organisational structures by which organisations are operated,
controlled and regulated, to ensure that they adhere to accepted ethical standards, good practice, laws and
regulations.

Question 24

Explain FOUR reasons why it is important to maintain effective governance standards within the procurement function.

Answer 24

• Procurement professionals potentially control large sums of money and they are in a position of trust
within the organisation; they have a duty of care, which may be jeopardised by unethical conduct
• Procurement professionals are faced by the opportunity to commit financial fraud or to misuse
systems or information for personal gain
• The decisions of procurement professionals typically benefit some suppliers over others. This creates
an incentive for suppliers to try to influence decisions, through bribery
• Procurement professionals are in a ‘stewardship’ role, responsible for finance and assets, which are
owned by other people. Unethical conduct may be represented by the theft, loss or damage of assets,
belonging to the owners of the organisation
• The reputation of the profession and the employing organisation may be damaged by fraud or
unethical conduct and enhanced by ethical conduct. Ethical standards are therefore an important
element in managing reputational risk
• Supply chain relationships may be damaged by unethical conduct. Ethical practices are therefore an
important element in procurement professionals maintaining a good status with suppliers

Question 25

Explain the impact of THREE objectives of a public sector organisation on its procurement activities.

Answer 25

• To deliver essential public services, such as education, healthcare and housing, which the private
sector might not provide. A typical impact of this would be that procurement must ensure an
adequate level of service in providing the goods and services needed in the education, healthcare and
housing sectors. This might be achieved by comprehensive specifications, including KPI’s and supplier performance monitoring
• To encourage national and community development; examples might include developing education
and skills, stimulating economic development and developing infrastructure, such as road networks
and communications. The impact of this on procurement activities would be careful supplier selection
and awarding contracts only to those suppliers with the capability to contribute to the appropriate
types of development
• To pursue socio-economic goals, such as support for small and minority-owned businesses, the
pursuit of sustainable development and environmental protection. Again, this would impact on the
type of supplier chosen; these must be suppliers who can contribute to the above requirements and
who’s values are the same as the public sector organisation
• Ensuring value for money and the efficient use of public funds, which mainly come from taxpayers.
The impact of this would be rigorous supplier selection and awarding contracts only to suppliers who
can provide the required level of service at the lowest possible prices

Question 26

Distinguish between direct and indirect procurements.

Answer 26

Direct : refers to a range of situations when the items procured are either for resale (eg goods purchased by a retailer), or for incorporation in goods for sale ) eg (raw materials and components purchased by a manufacturer.
Indirect : refers to the purchase of any other, ancillary items ( including MRO supplies, services and operating expenses).

Question 27

Name 5 advantages of Centralised Procurement.

Answer 27

1. Specialisation of procurement staff
2. Potential for the consolidation of requirements
3. More effective control of procurement activity
4. Avoidance of conflict between business divisions
5. Access to specialist skills, contacts and resources

Question 28

Primary Industry

Answer 28

Concerned with extracting natural resources from the earth. Includes oil extraction, mining (Capital Ex will be very high due to the need to buy/lease large, specialised heavy-duty machinery) and perhaps also agriculture.

Question 29

Secondary Industry

Answer 29

Manufacturing ; ‘making’ finished products out of raw materials and components. Main procurement activity is obtaining the inputs for the manufacturing process such as raw materials, components and sub-assemblies or modules.

Question 30

Stock to order

Answer 30

A non-stock procurement policy whereby the organisation only procures materials as required to fulfill orders received from customers

Question 31

The purpose of EU procurement directives are

Answer 31

• To open of the choice of potential supplier for public sector orgs and utilities. In order to stimulate comp and reduce costs
• To open up new, non-discriminatory and competitive markets for suppliers
• To ensure the free movement of goods/services within the European Union
• To ensure that public sector purchasing decisions are based on VFM (via competition) and that public sector bodies award contracts efficiently and without discrimination

Question 32

Explain 5 differences between operational expenditure and capital

Answer 32

• Cap ex items are charged to a capital account. whereas op ex is charged to a profit and loss account
• Capital items are procured for a long period of time and have a lifespan or many years. Op ex are for short
  term consumption
• Cap ex tend to be high value assets, whereas op items tend to be relatively inexpensive
• The procurement of Cap ex items involves complex requirements and decisions about expenditure are likely to involve a wide range of stakeholders. Op ex is usually less complex and often involves straight re buys
• Prep work on cap ex is likely to be lengthy and will involve building a business case, investment appraisal and the option to buy or lease. Op ex tends to be more straight forward and budgets are pre-set for regular demand

Question 33

Describe 5 potential costs of using electronic systems in procurement and supply

Answer 33

• The high capital investment and set-up costs of the electronic systems, including hardware and software items
• High initial learning curve costs, where users of the systems will have to be trained to use them efficiently
• Possible costs from the failure of data security; this may be because of malicious access to data or loss of data
• The cost of comparability issues, because suppliers will have to invest in the necessary tech to be able to work with their customers
• Possible redundancy costs, as electronic systems are faster and more efficient, meaning fewer staff will be required

Question 34

Explain the term ‘Devolved procurement’

Answer 34

Procurement responsibilities are not placed in the hands of a single, centralized department. Instead, they are given to procurement officers in different divisions. strategic business units or user departments. In service orgs it is common for procurement to be carried out by budget holders, rather than pr specialists

Question 35

Outline 5 disadvantages of a devolved procurement function

Answer 35

• The staff involved may not be pr specialists and pr may only be a small part of their work. As a result they will not have the required skills or knowledge and may not be able to select the best suppliers or monitor their performance
• Consolidation of orders may not be possible, so that bulk discount or economies of scale are not achieved
• There may be less coordination of pr activities and there may not be uniform pr polices and procedures, as there would be in a centralised func
• There is likely to be less standardisation of specs, possibly leading to reduced quality and efficiency
• Conflict between different divisions or business unites might arise, as they compete for scarce raw materials and there may be unequal budgetary allocations or pr expenditure

Question 36

Outline, using examples, FIVE elements of the total cost of ownership of capital equipment.

Answer 36

 Pre-acquisition costs, such as research and tendering
 Acquisition costs, such as the purchase price, the cost of finance if borrowing is necessary, delivery
and installation
 Operating costs, for example labour and materials
 Maintenance costs, such as replacement parts and servicing
 Downtime costs, such as lost production
 End of life costs, such as decommissioning and disposal

Question 37

It is widely believed that it is important to attempt to reduce costs and add value throughout the supply chain.
Explain THREE methods or techniques that might achieve such goals

Answer 37

 Value engineering, which is the process of analysing the value of a product at the design and
development stage
 Lean supply, which involves eliminating waste across the supply chain
 Agile supply, which involves collaborating closely with the supply chain to increase the speed and
flexibility of its response to changing customer needs
 Value-adding negotiations, which means collaborating closely with the supply chain to find ways of
improving processes and adding value, with mutual benefits to all parties

Question 38

Explain the activities that could be undertaken by an organisation to identify and appraise potential suppliers as part of the sourcing process.

Answer 38

• Activities would include constantly monitoring the supply market and engaging in market research. Other potential sources of information include procurement database records,supplier catalogues, trade directories, trade fairs and exhibitions, networking with other procurement professionals or using the internet.
• Pre-qualification criteria need to be established and one example of a model for doing this is the Carter 10 C’s model. Pre-qualification information should be collected and verified and activities to do this include self appraisal questionnaires, analysing the potential supplier’s financial statements and checking the supplier’s qualifications and accreditations. Finally, a site visit can be undertaken, the purpose of which is to confirm the information already collected and to make contact with key staff of the supplier.

Question 39

Explain 5 activities that take place post contract award.

Answer 39

 Expediting, which involves following up or chasing an order, perhaps by using an online track and trace
system
 Contract management, which is the process designed to ensure that both parties meet their
obligations and that the intended outcomes of the contract are delivered
 Supplier management, which are the activities involved in monitoring the performance of the supplier
and developing the supplier
 Contract termination, either when the contract is complete, or if one of the parties is in breach of the
contract terms
 Debriefing unsuccessful suppliers, following a tender process. This gives them the opportunity to
improve in the future

Question 40

Identify FIVE potential barriers to achieving good procurement governance.

Answer 40

 The lack of support from senior managers within the organisation
 A lack of co-operation from stakeholders in the procurement function, both in the internal supply
chain and the external supply chain
 Poor ICT systems and systems integration
 A lack of clarity in the organisation’s governance model, codes of conduct, rules and procedures
 A lack of resources, including finance and time, to incorporate any governance requirements
 A lack of coherence and co-ordination of procurement responsibilities

Question 41

Outline FIVE roles of a public sector regulator.

Answer 41

 The budgets of public sector bodies are set within frameworks laid down by government and
regulators are responsible for ensuring compliance
 Regulators also scrutinise expenditure to ensure that it is within government guidelines
 Regulators also protect national interests and public welfare, to ensure that all operations and
procurement are carried out in ways that will avoid negative effects on national interests
 Regulators also issue and renew licences where organisations need such licences to carry out their
operations and services
 Regulators set and advise on standards of good practice, quality standards and service levels
 Regulators handle complaints against public sector organisations, for example ombudsmen
 Regulators monitor and audit organisational activities for compliance to standards
 Regulators ensure that taxpayers’ money is spent appropriately

Question 42

Explain, with examples, how objectives for corporate social responsibility may impact on public sector procurement.

Answer 42

Environmental objectives, for example to
reduce waste, public sector organisations need to work with the supply base, in order to manage conflicting
objectives of reducing cost against the additional cost of monitoring. Because public sector procurement has a
stewardship role over the public money it spends, it is critical that records and audit trails are maintained to
prove accountability. Also, introducing CSR policies may require public sector procurement to support ethical
and responsible behaviour by supporting local businesses.

Question 43

(a) Explain, with examples, the characteristics of each of the following purchasing
categories:
(i) Commodities

Answer 43

Commodities are items that occur in nature. They may be mined or quarried, farmed or fished. Examples include coal, iron ore, cotton, tea and wheat. They are usually the raw materials that go into the manufacturing process to create finished products. Iron ore is used to make steel, cotton is used to make clothing, while wheat is converted into bread products. They are unequally distributed geographically
and they are often sourced internationally, resulting in exchange rate and transport risks. A further
characteristic is that they are often subject to significant price fluctuations, because of changes in supply and
demand

Question 44

(ii) Goods for resale

Answer 44

Goods for resale are finished goods that are sold on to
customers with little or no work carried out by the purchasing organisation. Examples include televisions,
computers, clothing and foodstuffs. Key
characteristics include ‘bottom line thinking’ because profit margins are likely to be low, broad
assortment, involving a wide range of products and the fact that buyers will usually purchase according to
supplier specifications.

Question 45

(iii) Maintenance, repair and operating (MRO) supplies.

Answer 45

MRO supplies are goods and services needed to transform raw materials and components into end products. Examples include paints, lubricants and packaging materials. One characteristic of MRO supplies is that manufacturing companies use such items regularly and this can lead to a large number of stock lines. Others include the fact that usage of such items can be relatively low, but the cost of procurement and stockholding can be high and that MRO supply availability is likely to be
crucial, in that their absence might disrupt operations and involve high costs.

Question 46

Outline FIVE circumstances where ‘buying for stock’ would be an appropriate
procurement policy.

Answer 46

• Where there is a long lead time, for example when buying from an overseas supplier
• Where items are critical for operations and running out of them would cause costly disruption to the
organisation, for example ‘bottleneck’ items
• Where there are legal requirements for holding items, for example health and safety equipment
• Where items are likely to appreciate in value over time, for example fine wines and timber
• Where the price of the item is expected to rise and purchasing now and holding in stock may result in
cost savings
• Where demand for the item is seasonal and the buying organisation lacks the capacity to deal with
peaks in demand, for example Christmas cards
• Where buying in bulk might lead to economies of scale and cost savings, which outweigh the storage
costs

Question 47

Outline THREE functions which could be included in a Purchase to Pay (P2P) system.

Answer 47

• Tracking and tracing deliveries
• Expediting by exception
• Automated receipt and inspection, verifying delivery to trigger payment, authorisation and automatic
payment
• Capturing of supplier performance data, budgetary control and spend data
• Receipt of invoices, automated invoice matching and electronic invoice generation
• The generation of payment, by e-payments or fund transfers

Question 48

Explain FOUR potential disadvantages of using electronic systems in the sourcing process.

Answer 48

• High capital investment and set-up costs, which may be too great, especially for small organisations
• High initial learning curve costs, for example the training of users and the cost of initial errors
• Reliability issues, such as the risk of network breakdown, viruses and power failure
• Compatibility issues with suppliers; some suppliers may be located in countries with a less developed
infrastructure
• Some small suppliers, who do not have access to electronic systems, may be precluded from doing
business, even though they may have the capabilities
• Data security risks, arising from unauthorised or malicious access to data
• Supplier relationships may become transactional as personal contact and face-to-face meetings are
reduced

Question 49

Define the term ‘ethics’.

Answer 49

‘Ethics’ are moral principles or values about what
constitutes ‘right’ and ‘wrong’ behaviour. At a corporate level, there are issues which face an organisation as it
formulates strategies and policies about how it interacts with its stakeholders, including Corporate Social
Responsibility. Examples include not dealing with suppliers who exploit their labour force or suppliers who offer bribes to win business; not discriminating in the award of a tender; not accepting gifts/hosp which may be perceived as seeking to influence; refusing to be party to fraud

Question 50

Discuss FIVE examples of ethical or unethical behaviour that could be addressed in
an ethical code for procurement professionals.

Answer 50

• Not accepting inducements or gifts from suppliers or potential suppliers, other than those of a
nominal value and which have been sanctioned
• Not allowing offers of hospitality to influence, or to be perceived to influence, procurement decisions
• Not allowing vested interests, such as having a family link or a personal interest in a supplier, to
influence procurement decisions
• Never breaching the confidentiality of information received in a professional capacity
• Ensuring that information given to suppliers is accurate and that all potential suppliers have access to
the same information
• Striving for genuine, fair and transparent competition
• Promoting positive environmental issues, such as reducing waste and increasing recycling
• Never using one’s authority or position for personal gain

Question 51

Describe, with examples, FOUR ways in which a third sector organisation’s objectives may impact on its procurement activities.

Answer 51

• Raising public awareness of the organisation’s cause; this might be for an environmental or social
pressure or interest group. The impact on procurement is that all procurement activities must be
done in a way that conforms to the organisation’s objectives. For example, in the case of an
organisation concerned with environmental issues, procurement activities must be arranged in an
environmentally friendly manner
• Political lobbying and advocacy on behalf of the organisation’s cause. The impact on procurement is
that purchases that might be seen to go against the cause should be avoided
• Raising funds to carry out the organisation’s activities, perhaps using commercial operations to
generate profits. This is likely to impact on procurement in that any purchases to be made for resale
must be attractive to customers, in terms of quality and price
• Providing material aid and services to beneficiaries, such as the homeless or the aged. The impact on
procurement would be to source items that would contribute as much as possible to the
organisation’s cause
• Providing services to members, for example trade unions advocating employment rights and
professional bodies securing ethical and technical standards. The impact on procurement would be to
source only from suppliers who have similar objectives
• Mobilising and involving members of the public in community projects for mutual benefit. The impact
on procurement will be that purchases will need to be made that will add to the organisation’s
objectives in some way

Question 52

Explain the impact of regulation on a third sector’s procurement function

Answer 52

In the third sector, procurement functions are more closely regulated than in the private sector. This is because they are spending money which is derived from donations and government grants. This means that procurement is performing a ‘stewardship’ role, with a strong emphasis on accountability. Also, third sector organisations, such as charities, will need to ensure that
procurement complies with the charity’s legal requirements and those of the Charities Commission.
Regulators may check that a third sector organisation is run for the public benefit and not for private
advantage. This means that information must be made available to the public and that activities are audited.
Regulators may also investigate complaints about possible mismanagement or abuse. This will apply to the third sector organisation in general and to the procurement function specifically.

Question 53

Explain FIVE factors that impact on purchasing activities in the retail sector

Answer 53

 Bottom line thinking: Retailers do not add much value to the goods they sell and their margins are
small. As a result, buyers must focus on goods that will sell well at the best possible profit margins
 Broad assortment: One of the functions of retailers is to make available to customers a wide range of
goods offered by many different manufacturers. The number of stock lines and suppliers is high and
buyers have to attempt to monitor prices, quality and supplier terms and conditions
 Buying against supplier specifications: Retailers generally buy what is available on the market, as
described by suppliers, who determine the specifications. As a result, changing suppliers is easy for
retailers and supplier relations are less durable
 Short feedback loop: In the retail sector, buying products and selling them are close together in time.
As a result it quickly becomes apparent which products are selling and which are not. A fast response
to such information is a key requirement for procurement
 Product mix: A retailer develops a product mix to maximise sales. This mix will change in line with
seasons, tastes and fashion. Therefore retailers have to monitor contemporary themes among its
customer base and ensure that customer feedback is accurate and regular
 Control of stock: The retailer will want to maintain sufficient stock to avoid stock-outs, or it may lose
customers to competitors. On the other hand there is a need to avoid the cost of holding too much
stock. The solutions are accurate demand forecasting,, responsive replenishment systems and agile
supply chains, capable of delivering on short lead times

Question 54

Decentralised structure

Answer 54

• Local responsibility: important where units are a long distance away from a central location
and/or where each unit’s requirements are specific.
• Knowledge of the local environment, culture and customer needs might give benefits to local
suppliers and the local economy.
• Skills development of buyers in each unit as there may be an element of local purchasing if only
for MRO items and facilities management.
• Better communication and coordination between procurement and operating departments,
• Customer focus: buyers are ‘closer’ to internal and external customers developing
understanding of user needs and problems.
• Quicker response to operational and user needs, environmental changes and problems by local
buyers close to the scene of operations.
• Smaller purchase quantities: sacrificing economies of scale, but reducing costs and risks of
holding inventory.
• Accountability: divisional managers can be held accountable for performance only if they have
genuine control over operations.
• Freeing central procurement units to focus on higher-level, value-adding tasks.

Question 55

Explain FOUR challenges for procurement when purchasing services due to
their distinctive features.

Answer 55

 The fact that services are intangible means that procurement will have to look for other attributes,
such as service levels, price and convenience
 Because services are inseparable, the efficiency and effectiveness of the people concerned and the
processes is crucial, so that procurement must get this right in selection and evaluation
 To address the challenge of services being heterogeneous, the consistency of provision is difficult to secure. Procurement will therefore have to develop specifications or service level agreements
 As services are perishable and can’t be stored, Procurement will have to plan carefully to get the
availability and timing right
 Because ownership of services doesn’t transfer, requirements will have to be defined in specifications
or service level agreements

Question 56

Outline THREE circumstances in which an organisation might buy and hold items in stock rather than buying them only when needed.

Answer 56

 Items that are critical to the production process and their unavailability would cause disruption
 Seasonal items where holding items in stock would manage seasonal demand ( Christmas Cards)
 Items that increase in value over a period of time (Wine)
 Where it is anticipated that the price of items will rise in the future
 If there are legal reasons why items have to be stored on site (Safety equipment)

Question 57

Identify the main stages of a sourcing process (also known as the purchasing
or procurement cycle).

Answer 57

 Identifying a need
 Describing the need in terms of a specification
 Developing contract terms
 Sourcing the market to identify suitable suppliers
 Appraising potential suppliers
 Inviting quotations or tenders
 Supplier selection
 Negotiating to improve terms
 Contract award
 Contract management

Question 58

Describe FOUR benefits of using electronic systems in the sourcing process.

Answer 58

 Cost savings as processes are streamlined and speeded up
 Improved communication through the internal and external supply chains
 A higher degree of accuracy of data input, manipulation and transfer
 Reduced cycle and lead times as electronic systems are more responsive
 The availability of real time information, for example inventory levels or delivery progress to support
planning and decision making
 A reduced risk of fraud through fewer cash transactions

Question 59

Explain FIVE key areas of guidance for procurement professionals within the CIPS Code of Conduct.

Answer 59

 Members must disclose any personal interest which might impinge on their work activities, or which
might appear to do so
 Members must respect the confidentiality of information that comes into their possession and it must
not be used for personal gain
 Members must avoid any arrangements which might prevent fair competition
 Business gifts from suppliers or potential suppliers must not be accepted, except for those of low value
 Any hospitality offered by suppliers or potential suppliers must be modest
 Members must maintain the highest standards of integrity in all business relationships
 Members must ensure that they fully comply with any applicable laws or regulations

Question 60

Discuss FIVE ways in which the objective of profitability, in a private sector
organisation, might impact on its procurement activities

Answer 60

 A pressure to focus on reducing expenditure, by becoming more adversarial, or buying cheaper
inputs. This might, however, increase costs in the future if cheaper products lead to poor quality,
which may result in scrap or reworking
 Value Analysis and Value Engineering might also result in lower costs, by challenging the nature of
inputs and the procurement function can contribute to this process, involving suppliers to add value
 Waste reduction and value-adding, which has resulted in the procurement function moving from
being a reactive activity to a proactive one
 Adopting Supply Chain Management concepts, which involves the procurement function moving from
an adversarial approach to collaborative or partnership working
 The procurement function can also add value by a careful approach to supplier evaluation and
selection
 Introducing activities such as early buyer involvement and early supplier involvement can also assist in
lowering costs at the early stage of design

Question 61

Describe FIVE sequential stages of a typical tendering process.

Answer 61

 the identification of a need and how this might arise
 an evaluation of the suitability of the tendering process, as opposed to alternative methods of
sourcing
 a detailed description of the need, through specifications, which might be conformance or
performance
 carry out market research to identify suppliers who might be able to fulfil the need
 the preparation of draft contract terms, with examples
 a decision on whether to use open or selective tendering
 the determination of a realistic timetable for the tendering process
 the issue of invitations to tender, accompanied by specifications
 the submission of completed tenders by potential suppliers, within the deadline specified
 the opening and analysis of each tender against the stated criteria, with a view to selecting the best
offer, which might be on the lowest price or best value basis
 the award of the contract and notification of the award
 the de-briefing to unsuccessful tenderers to enable them to improve performance in future bids

Question 62

Outline THREE areas in which organisational policies could affect the procurement
function.

Answer 62

 levels of delegated authority for procurement staff
 policies on sourcing, such as single, dual or multiple sourcing
 ethical and sustainable procurement, corporate social responsibility and how this might impact on
supplier selection
 policies on make or buy
 an intention to comply with all relevant laws and regulations, standards and codes of practice
 responsibilities at different stages of the procurement process

Question 63

Explain the need for a formal systematic approach to structuring processes and procedures

Answer 63

• Ensures that all tasks have been performed that need to be performed, without gaps
• Ensures adequate co-ordination of effort between parties collaborating in a process
• It prevents conflict and sub-optimal behaviour
• It enables meaningful process analysis, problem-solving and improvement
• It supports the systematic development of procurement staff, systems, tech and other resources
• It fosters efficiency, by mandating the most efficient method or procedure

Question 64

Describe 5 types of supplier relationship

Answer 64

• Spot Buying : making one-off procurement’s to meet requirements as they arise, taking advantage of best available terms at the time
• Regular Trading : giving repeat business to a group of preferred (known,trusted) suppliers
• Fixed or call-off contracts : framework agreements or blanket ordering
• Single Sourcing ; giving exclusivity to one preferred supplier
• Strategic Alliance : agreement to work together with a supplier for long-term mutual advantage in a particular area
• Partnership : agreement to work closely together, long-term, and on range of issues, for collaborative problem-solving and development

Question 65

Right price for a supplier

Answer 65

• A price which the market will bear
• A price which allows the seller to win business, in competition with other suppliers
• A price which allows the seller to at least cover its costs, and ideally to make a healthy profit which will allow it to survive in business and to invest in growth

Question 66

Right price for buyer

Answer 66

• A price which the buyer can afford
• A price which appears fair and reasonable, or represents VFM
• A price which gives the buyer a cost or quality advantage over its competitors
• A price which reflects sound procurement practices : requiring suppliers to price competitively, negotiating skillfully, recognising the difference between strategic/critical and non-critical/routine items

Question 67

Factors in buyers decision on price

Answer 67

• The buyers relative bargaining power in the market and the relationship
• The number of suppliers in the market and the possibility of substitute products
• The prices paid by competitors ( if available)
• What is a fair and reasonable price , based on price and cost analysis
• What is a fair (ethical and sustainable) price from the buyers and suppliers point of view
• The total package of benefits offered for the price, and weather value is better at a higher price ( given the need for quality, delivery, supplier relationship etc)

Question 68

Just in time (JIT)

Answer 68

Japanese approach to inventory reduction which aims to ensure that goods only arrive at the factory ‘just in time’ to go into the production process. Every effort is made to minimise stock holding, by securing demand-driven late delivery of required quantities of supply

Question 69

What circumstances may procurement function as internal consultancy

Answer 69

• Part-time buyers or non proc staff in other dept’s where they lack the specialist skills, disciplines and contacts for effective and cost efficient procurement’s.
• Proc is required for a multi functional project (Construction or IT), proc function is ideally placed to research and recommend pr solutions.
• Specific skills or info is req’d by other functions, project teams or managers. May be able to offer training on negotiation techniques, do bench marking exercises on competitors logistics or QM processes, putting the product dev team in touch with potential supply partners ( ESI in design and specs)
• Proc lack authority to impose proc disciplines, procedures or decisions so need to influence by promoting its value adding activities

Question 70

The Third Sector (Non for Profit)

Answer 70

Private sector org who’s primary activity is to deliver services/goods rather than profit
Charities, churches, private schools

Set up to deliver defined purpose or represent interests of a group rather than maximise profits

Derive income from donations, grants, and some have trading arms. Red Cross Oxfam

Could be owned by members or by a trust and managed by board of trustees

Question 71

What is a Market Economy

Answer 71

The basis of the private sector operates on the basis of supply and demand. Customers buy what they want at a price they can afford. Orgs compete in this market and still make a profit. Hence customer choice decides which goods are produced

However some services deemed essential for the well-being of everyone may not want to be produced by commercial orgs. In these situations when supply demand fail the Govt step in to control and fund it by taxation and public borrowing

Question 72

What is a mixed economy

Answer 72

A blend of private and public sectors (neither has complete control). Instead Govt controls essential services and basic industries which cannot attract corporate funding while still encouraging private enterprise.

Question 73

What is a condition in a contract

Answer 73

A vital part which if breached may be viewed as a significant failure and the damaged party has the option to terminate the contract and claim damages

Question 74

What are implied terms

Answer 74

Implied terms are words or provisions that a court assumes were intended to be included in a contract. This means that the terms aren’t expressly stated in the contract

Question 75

What is express terms

Answer 75

Clearly stated and recognised in the contract by both parties eg price delivery dates insurance costs etc.

Might even cover when each party doesn’t become liable for failure to fulfill obligations

Question 76

What is a conformance specification

Answer 76

Buyer details exactly what they require including parts materials so suppliers simply conforms to this description

Question 77

What is a performance (or function) specification

Answer 77

A brief document where buyer states what the part is to achieve in terms of function, performance levels and input parameters.

The supplier decides how to furnish a product to service this need and has great flexibility in doing so

Question 78

Why are strong internal stakeholder relationships important

Answer 78

Orgs depend on staff to deliver serviced so their buy in is essential to achieve customer satisfaction and business goals

People need to work together across functions so they need a good understanding of everyone else’s views and priorities

EU law means employee consultation on some matters are a legal requirement eg redundancies

Strong communication channels prevents and mitigates conflicts

Strong communication enhances employee job satisfaction and employer brand

Question 79

Possible drawbacks of SCM

Answer 79

• It requires considerable investment, internal support and supplier/client willingness
• It involves focusing on closer supplier relationships with a smaller number of supplier and clients
• Network information sharing may expose the firm to loss of control over commercial, informational, intellectual assets and distinctive competencies
• There may be problems in fairly distributing the gains and risks of co-operation between supply chain partners

Question 80

Importance of stakeholders

Answer 80

• They may seek to influence the org, if they perceive that their interests are threatened
• There is strong public and regulatory pressure for business orgs to be socially respnsible
• Organisations themselves increasingly follow (and publicise) ethical and corporate responsibility frameworks

Question 81

Governance mechanisms for procurement

Answer 81

• A strong internal control environment designed to support business objectives and manage identified areas of risk: robust internal policies, checks and control mechanisms
• Clearly defined roles, responsibilities, accountabilities and reports structures for procurement
• The segregation of pro duties (The same person is not responsible for authorising and making payments, which might enable falsification of transactions)
• Rotation of project buyers, to avoid any particular buyer becoming too cosy with any particular supplier
• Clear requirements for approvals and authorisations of reqs, procurement’s and payment
• The effective budgeting, control and monitoring of pr spend across the org

Question 82

Purpose of procurement audits

Answer 82

• To monitor and enforce compliance with the pro policies laid down by senior mgmt ( preventing maverick buying and risk)
• To ensure that the org is using good or best practice procedures, working methods, tools and techniques (compared to benchmark standards, or benchmarked performance of best practice orgs, centres of excellence or competitors)
• To monitor and the measure the extent to which organisational resources are being used effectively, efficiently and with an eye to best value
• To support the prevention and detection of fraud, error, mismanagement of funds, inadequately managed risks and other governance problems

Question 83

An effective organisation structure will have the following features

Answer 83

• Clear paths of reporting and accountability
• Effective mechanisms for multi-directional info flows and co-ordination
• Effectively short chains of decision making
• Minimal duplication of effort ( co-ordination and efficiency)
• Soft ‘vertical’ barriers between functions, to support the smooth flow of value ‘horizontally’ towards the customer (via internal supply chains)
• In-built flexibility (in order to remain responsive to changing business environments and customers demands)

Question 84

Purpose of Mendelow matrix

Answer 84

• Identify stakeholders whose needs and expectations will define value and shape the functions priorities and policies ( Senior mgmt or key suppliers)
• Identify stakeholders whose interests will be most affected by a decision or action,and towards whom the org may therefore recognise some moral or legal obligations ( communities impacted by logistics ops)
• Prioritise stakeholder interests, so the resources are utilised efficiently or leveraged for max advantage
• Identify stakeholders who will need to be informed, consulted or involved in the design or implementation of procurement exercises and policies (internal and external supply chain partners)

Question 85

Pareto Analysis is

Answer 85

a statistical technique in decision-making used for the selection of a limited number of tasks that produce significant overall effect. It uses the Pareto Principle (also known as the 80/20 rule) the idea that by doing 20% of the work you can generate 80% of the benefit of doing the entire job

Question 86

Managing stakeholders (Mendelow)

Answer 86

• Stakeholders with neither power nor interest (A) are a low-priority group: resources will not be wasted taking their goals or potential response into account. (Small investors, large org with small volume of business)
• Stakeholders in segment (B) are important because of their high interest: they may have low direct impact but unless they are kept in the loop and understand the need for decisions, they may seek additional power by lobbying/banding together to protect their interest. (Community, small supplier, employee groups) Keep informed
• Segment (C) are important because of their high influence: they currently have low interest which may be aroused, if they are dissatisfied or concerned. (Large supplier, senior manager not directly affected) \Keep Satisfied
• Segment (D) are known as key player. Key influence and motivated to use it in their own interests (Major customers, key suppliers, senior pro managers). Strategy is early involvement and participation, so goals can be integrated with org goals - securing support, rather then resistance

Question 87

Techniques to monitor service levels

Answer 87

• Observation and experience
• Spot checks and sample testing
• Business results and indirect indicators
• Customer/User feedback
• Electronic performance monitoring
• Self-assessment by the service provider
• Collaborative performance review

Question 88

Kraljic Matrix seeks to map

Answer 88

• The importance of the item being purchased (related to factors such as the orgs annual expenditure on it, and its profit potential through enabling revenue of cost savings)
• The complexity of the supply market ( Factors such as the difficulty of sourcing the item, the vulnerability of the buyer to supply or supplier failure, and the relative power of buyer/supplier in the market)

Question 89

Procurement techniques to obtain VFM

Answer 89

• The use of value analysis to eliminate non-essential features: looking critically at all of the elements that make up a product/service and investigating whether that are really necessary, and can they be done more efficiently or cheaply
• Challenging user generated specs, to minimise variety, stock proliferation and over-specification (specifying unnecessary features or quality)
• Consolidating demand (aggregating orders or forming a consortium with other buyers) to benefit from bulk discounts and higher bargaining power
• Eliminating or reducing inventory and other non value adding wastes
• International sourcing (to take advantage of low-cost country production) - may bring risks and additional costs

Question 90

Procurement’s contribution to sustainability

Answer 90

• Developing sustainable procurement (SP) objectives and policies, which can be communicated to stakeholders throughout the SC
• Sourcing from local, small and/or diverse (female owned, minority owned) suppliers, where consistent with good value
• Working with internal customers and external suppliers to develop sustainable products designs and specs, using fewer, recyclable, energy saving, low carbon emission and other green inputs
• Reducing product packaging or developing recyclable packaging, to minimise waste sent to landfill
• Planning transports and logistics to minimise social and environmental impacts such as traffic congestion, noise, fuel use and emissions

Question 91

Innovation

Answer 91

Recognising a need in the marketplace that is currently unsatisfied and being first to react in satisfying that need ahead of competitors. Working close with suppliers is critical to both of these aspects, meaning the role or purchasing is vital

Question 92

MRP

Answer 92

Is a production planning, scheduling, and inventory control system used to manage manufacturing processes. A set of logically related procedures, decision rules and records for managing dependent demand items. Designed to translate a master production schedule (MPS) and a bill of materials (BOM: a breakdown or all the materials and components required for production) into time-phased net requirements (taking into account existing stock levels) which trigger purchasing

Question 93

ERP

Answer 93

consolidates materials, manufacturing, logistics, supply chain, sales/marketing, finance and HR planning info into one integrated mgmt system : a single database able to offer ‘real time’ info for solving a range or business problems

Question 94

Securing on time delivery

Answer 94

• Ensure that users and proc staff understand lead times, and check that lead times are realistic (given the demands of the job and the capability and track record of the supplier)
• Give suppliers advance notice of ongoing or future requirements (where possible)
• Select suppliers with a good delivery track record and capabilty
• Ensure that suppliers understand the importance of on-time delivery: perhaps making it a KPI for the evaluation of supplier performance, or including contract terms which clearly state that ‘time is of the essence’ (make delivery condition or contract)
• Issue accurate and realistic delivery schedules to suppliers

Question 95

Supply chain implications for proc roles and ops

Answer 95

• Co-ordinate activities across the supply chain in order to maximise the efficient flow of value towards the customer
• Develop appropriate relationships with suppliers, in order to ensure that linkages are maintained
• Select, evaluate and develop suppliers in relation to the effectiveness of their own supply chain mgmt
• Work collaboratively with SC members, to secure added vaue, cost and quality improvements throughout the SC as a whole - which benefits all members
• Structure SC effectively, in order to maintain control over their activities (minimise the risk of supply disruption and or rep damage), while minimising the effort and cost of doing so ( by dealing with an immediate or ‘first tier’ supplier with control over its own SC)

Question 96

The influence of government

Answer 96

• Influence the operation of organisations: what they can and cannot produce, and how they produce it (laying down restrictions on production processes in order to protect the environment)
• Influence the costs and revenues incurred by orgs: by the application of taxes and duties on the production and sale of certain goods, and by the effect of taxes on the general level of consumer spending
• Influence orgs by the actions they take in pursuing macroeconomic objectives ( establishing exchange rate and interest rates, by the extent to which they stimulate aggregate demand in the economy)
• Influence the values and norms that are regarded as acceptable within the national culture, and hence indirectly affect the outputs produced by orgs and the ways in which orgs behave