D3 Exam Questions Flashcards

Question

1 **(a) Describe FOUR potential benefits** for Naturally Me **when sourcing from small businesses rather than larger suppliers.** **(12 marks)** Jan 2018, Jan 2014 [View Exam Paper with Case Study](https://drive.google.com/open?id=1zjVpvBFFBI_24LERdCyaeoLDIwZe_DoW) [View Exam Moderator answers](https://drive.google.com/file/d/1sci3okRGtecTUhOo3EAMkNOZxMpyrf5x/view?usp=sharing)

Answer 1

***p. 65 2.6*** * Access to a wider supply market, potentially enhancing competition (and therefore lower pricing through the market as a whole) * Competitive pricing due to lower administrative overheads and management costs * Greater responsiveness and flexibility (with shorter decision-making and approval channels) * Innovation capability and diversity of business solutions, through the early exploitation of new technology, providing products or services in new or underdeveloped markets, or using innovation capability to differentiate themselves from established market players. * Expertise in focused niche markets * Willingness and ability to produce small-order, niche, bespoke and customised items ( where larger suppliers may have minimum order quantities and standardised offerings) * Higher quality specialist products, due to greater skills, originality and commitment where the market is unattractive to larger enterprises) * Higher commitment and levels of services (due to the value of the business to the supplier)

Answer 2

***p.67 3.2*** Ethical sourcing involves the application of moral principles within all stages of the sourcing process. Answers covered aspects at one or more of the following levels: - • Macro level – might include issues under Ethical Trade Initiative (ETI) such as globalisation, labour exploitation, and industrialisation impact on the environment. These are key issues for Naturally Me to address and provide economic, social and environmental safeguards for its Sherabu oil supply chain. • 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. ***p.68 3.3*** * The promotion of fair, open and transparent competition in sourcing (and the avoidance of unfair, fraudulent, manipulative or coercive sourcing practices) * The use of sourcing policies to promote positive socio-economic goals such as supplier diversity, support for local and SME suppliers, and minimisation of transport miles (to reduce environmental impacts and carbon emissions) * The specification and sourcing of ethically produced inputs (eg certified as not tested on animals, drawn from sustainably managed or renewable sources; or manufactured under safe working conditions) * The selection and management of suppliers to promote ethical trading, environmental responsibility and labour standard at all tiers of the supply chain (eg by prequalifiying suppliers on CSR policies, ethical codes, environmental management systems, reverse-logistics and recycling capabilities, and supply chain management; and incentivising, monitoring and developing supplier ethical performance)

Answer 3

***p.19 table 1.3*** Areas which an organisation might use to monitor supplier performance might include: - * 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 * Innovation capability – e.g. the number of innovations proposed or implemented; the level of investment in research and development * Technology - leverage and compatibility in terms of the number of electronic transactions; the supplier’s willingness to adapt to Grocery Grande’s technology and processes

Answer 4

***p.19 table 1.3*** The criteria that Crown Agents’ clients may use to monitor and measure supplier performance might include: - * 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. * Innovation capability: - the number of innovations proposed or implemented, and the level of investment in research and development (e.g. vehicles and laptops are subject to quick changes). * Technology leverage and compatibility: -e.g. the number of electronic transactions achieved; the supplier’s willingness to adapt to Crown Agents’ global systems; etc. * Other factors – e.g. prompt and accurate documentation/invoicing; good labour relations; etc.

Answer 5

***p.3 1.8*** * They are important or core to the existence of the business as a brand and its ability compete in the market. * They are of a long term nature, i.e. not easily changed or substituted in the short term, as in in the case of Zingle’s orange flavouring purchases. * The market for these purchases is highly complex due to the limited number of global suppliers, thus requiring a clear understanding of the supply market capabilities and drivers. * They require long-range, high-level decision making processes, e.g. need for robust procurement policies in such areas as sustainability/ethics, the supplier base, supplier relationships, etc. * The sourcing process for strategic purchases would naturally focus on long term mutual dependency between Zingle and its suppliers, and therefore concerns for: - 1. Rigorous sourcing processes to ensure strong long term relationships are developed. Some of the key factors to be considered would include total acquisition cost, security, sustainability and supply competitiveness. 2. Long term contracts would need to be considered for such items with long-term nature, potential high risk and strategic impact (relevant aspects from Kraljic matrix may be discussed). Orange flavouring for example is a natural extract most likely subject to ‘commodity’ markets which are characterised by volatile supply. *Higher scores were given to candidates that demonstrated depth of theoretical understanding and application, e.g. by including relevant concepts from Kraljic Matrix.*

Answer 6

***p.11*** ‘Pre-qualification’ is the screening of suppliers to identify their suitability based on predetermined criteria. The process could be carried out using a pre-qualification questionnaire (PQQ) or request for information. The case study information states that Fruity Flavours meets Zingle's supplier criteria apart from its financial stability- perhaps confirmed by a prequalification process. Supplier prequalification would assist Zingle in its sourcing process in the following ways:  Only suppliers with certain minimum standards of capability, capacity, sustainability and compatibility, etc. are invited or considered for participation in a sourcing process.  It enables Zingle to prepare an approved list for suppliers that are already pre-screened prior to receiving any invitations to tender or RFQs. The case study information states that Zingle has not run a competitive tender process for orange flavouring for 15 years.  Pre-qualification helps to embed qualitative selection criteria into the supplier selection process. However, this should not compromise fairness and economic sense in the final selection decision. Pre-qualification of alternative suppliers to Fruity Flavours could provide Zingle an opportunity for potential supplier switching through a tendering.

Answer 7

***p. 32*** Competitive tendering might achieve the lowest price for Hughes and Son. However, this method is subject to such conditions as: - * The value of the procurement should be high enough to justify the expense of the tendering process * The specifications must be clear and potential suppliers must have a clear idea of the costs involved in fulfilling the contract * There must be sufficient suppliers in the market to ensure that there is competition * The potential suppliers must be both technically qualified and keen to win the business * There must be sufficient time available for the competitive tendering process to be carried out Competitive tendering is not a suitable method in situations where: - * Price is not the only or most important criterion in the award of the contract * Changes to the specification are likely as the contract progresses * To get merit/distinction grade:* * The value of the contract is high relative to the size of the business; the specification is still being developed; there is a wide range of potential suppliers who may be technically qualified; and there is time to carry out the process.* * Besides securing the lowest price, competitive tendering ensures fairness and genuine competition by involving a wide range of suppliers.* *State whether or not the budgeted spend of $100,000 is a high or low contract value, in terms of justifying the cost of tendering.* *Suggest alternative methods of awarding the contract, e.g. direct negotiations with suppliers or issuing Requests for Quotations (RFQs) to at least three potential suppliers.*

Answer 8

***p.51 3.8*** * Whether the supplier has innovation capability to meet current and future needs * capabilities the supplier has in such areas as engineering, innovation, design and late customisation * the supplier’s capability to respond swiftly and flexibly to urgent or additional requirements * type of plant and machinery, its capability to meet WEL’s specifications * how old and well-maintained the supplier’s plant and machinery is * the efficiency of the supplier’s factory layout and processes * Quality control systems, processes and accreditations

Answer 9

p.52 3.1 **Compatibility**: the compatibility of a supplier’s systems and procedures with EML’s to facilitate operational connectivity. **Willingness to comply:** with any rules or systems specified by EML – e.g. for the management of quality; environment; confidential information and intellectual property; production schedules; etc. **Quality management systems:** the supplier’s accreditation; its quality management practices and values (TQM, zero defects, continuous improvement) – including willingness to adapt to EML’s requests. **IT development:** the potential/willingness for e- business and systems integration - e.g. connectivity to EDI, extranet or RFID technology. Any other relevant systems or procedures that will enhance efficiency and effectiveness in areas including: ISO14001 accreditation for environmental management; production control; stock control; payment of suppliers; compliance with labour standards; etc. Production capacity – EML might asses the supplier’s effectiveness in setting and meeting lead times; the utilisation of available machines; workforce strength and shift patterns; repair and maintenance scheduling; its logistics and supply chain management systems; flexibility and contingency plans, etc. This criterion is critical considering EML’s has multiple sites where delivery of goods/services will be required.

Answer 10

## Footnote ***p.50 3.6*** The typical financial checks on a supplier’s performance might include: * 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. * Borrowings and the ratio of debts to assets (e.g. gearing) indicating areas of risk and costs associated with debt finance. This would indicate the degree of risk in contracting with the supplier. * Supplier’s capital assets to ascertain whether the supplier has sufficient resources. Work out related ratios – e.g. return on capital assets and return on capital employed –

Answer 11

a) Benefits of supplier prequalification might include:  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.  PBL will be assured that the suppliers on the approved list have been assessed as suitable and capable of fulfilling its existing requirements.  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 PBL 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.

Answer 12

The supplier prequalification criteria may be derived from one or a combination of the following models: * 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.

Answer 13

***p. 50 3.6*** Examples of commercial criteria that could be applied by Grocery Grande 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 serviced - could also include the initial purchase price, volume capability, admin costs, efficiency of systems and processes. * Ethical and environmental requirements. ***p.51 3.8*** Examples of technical criteria that could be applied by Grocery Grande 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.

Answer 14

***p.43 4.28*** * Understanding/**defining the business needs**/requirements – the nature of Magna’s business or objectives and the current states of affairs operationally; equirements/demand analysis -determining specs, volumes, priorities, etc; * **Engaging the key stakeholders** – determine the nature of their requirements and objectives,schedule meetings to help gain leverage on impending decisions in connection with compliance and other sourcing strategies. * **Researching 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. Collection and analysis of market data to identify potential suppliers, both new and existing. * **Evaluating the sourcing options and strategies** – depending on the nature of the product and the market. Such options might include whether the organisation should source through negotiations or tendering (and what type), locally or internationally; from single or multiple sources; outsourcing or subcontracting; make or buy, local or foreign; initial data collected might also help decisions on the strategies and processes to be adopted eg the Kraljic Matrix may come into play. * **Developing a robust supplier selection process** through tendering and/or negotiation –there is a possibility for combining tendering process and direct negotiation on the basis of the nature of the company's requirements. For this process, the organisation will need to **define appropriate selection and award criteria** using such approaches as 10C's thus to deliver the required technical and commercial result. These are critical in the final objective of securing a supplier that provides the best value for money to be spent on sourcing goods and services. * **Determining the final contract award and management process** – stipulation of clear terms and conditions of conducting the business relationship, KPIs and how they will be monitored; supplier development initiatives to improve supplier performance; etc. * Devise a **strategy for implementing** the sourcing plan, e.g. allowing reasonable timescales, engaging and managing stakeholders, and other methods for monitoring and coordinating the effectiveness of the plan.

Answer 15

**_Financial Stability_** * Review of the profitability, cash flow and cost structure to support the supplier’s ability fulfil the contract and remain sustainable * 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. * The typical financial checks on a supplier’s performance might include: * 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. * Borrowings and the ratio of debts to assets (e.g. gearing) indicating areas of risk and costs associated with debt finance. This would indicate the degree of risk in contracting with the supplier. * Supplier’s capital assets to ascertain whether the supplier has sufficient resources. Work out related ratios – e.g. return on capital assets and return on capital employed – **_Technical Ability_** * Whether the supplier can produce the inputs or deliver the required services. This includes ascertaining the supplier's operational capabilities in areas such as innovation, design and just-in-time supply, and the flexibility for late customisation * Whether the supplier has innovation capability to meet current and future needs * Capabilities the supplier has in areas such as engineering, innovation, design and late customisation * The supplier’s capability to respond swiftly and flexibly to urgent or additional requirements * Type of plant and machinery, its capability to meet specifications * How old and well-maintained the supplier’s plant and machinery is * The efficiency of the supplier’s factory layout and processes * Quality control systems, processes and accreditations **_Production capacity_** * The volume of business that the supplier is capable, or could be capable of handling, in terms of the existing production capacity, the extent to which this is already committed and the potential to increase capacity in the future * Might asses the supplier’s effectiveness in setting and meeting lead times; the utilisation of available machines; workforce strength and shift patterns; repair and maintenance scheduling; its logistics and supply chain management systems; flexibility and contingency plans, etc. This criterion may be critical considering if organsation has multiple sites where delivery of goods/services will be required. **_Systems capabilities_** * Whether the supplier's systems and procedures are ***compatible*** with those of the organisation facilitate operational connectivity * Willingness to comply with any rules or systems specified by the organisation – e.g. for the management of quality; environment; confidential information and intellectual property; production schedules; etc. * The potential/willingness for e- business and systems integration - e.g. connectivity to EDI, extranet or RFID technology. * Quality management systems: the supplier’s accreditation; its quality management practices and values (TQM, zero defects, continuous improvement) – including willingness to adapt to the organisation's requests. Any other relevant systems or procedures that will enhance efficiency and effectiveness in areas including: ISO14001 accreditation for environmental management; production control; stock control; payment of suppliers; compliance with labour standards; etc. **_Quality and quality assurance_** * The state of the supplier’s quality systems, such as quality assurance or total quality management, to sustain the right quality of goods and services supplied * It should adequately meet and satisfy the company's exacting specification tolerances and relevant compliance requirements. Aspects to examine would include QA/QC processes, quality culture such as TQM, ISO accreditation, etc.

Answer 16

***p.77 1.2*** * A financially stable supplier will be profitable and potentially flexible in negotiations; it will be solvent and operationally stable-fulfilling its contractual obligations in the short term; and ensuring supply continuity in the long term due to, for instance, its attractiveness to investors; etc. * On the other hand awarding a contract to a financially unstable supplier would be risky in terms of – delivery disruptions (inability to meet targets); compromising quality (cutting corners); undermining agreed payment terms (e.g. chasing advance payment); going into administration or ceasing trading (with consequential supplier switching costs); etc.

Answer 17

***p.77 1.2*** * To ascertain profitability which is a key indicator of stability and potential flexibility in negotiations; * To know the solvency/liquidity status which would assure Magna that the supplier is financially stable to meet its internal and external obligations; * The financial data will reveal the supplier’s attractiveness to investors, which is a good indicator of supply continuity in the long term. * On the other hand awarding a contract to a financially unstable supplier would be risky in terms of – delivery disruptions (inability to meet targets); * Compromising quality (cutting corners); * Undermining agreed payment terms (e.g. chasing advance payment); * Going into administration or liquidation (raising the undesirable possibility of supplier switching costs for Magna Racing)

Answer 18

***p.77 1.2*** To ascertain profitability which is a key indicator of stability and potential flexibility in negotiations; To know the solvency/liquidity status which would assure the buyer that the supplier is financially stable to meet its internal and external obligations; The financial data will reveal the supplier’s attractiveness to investors, which is a good indicator of supply continuity in the long term. On the other hand awarding a contract to a financially unstable supplier would be risky in terms of – delivery disruptions (inability to meet targets); Compromising quality (cutting corners); Undermining agreed payment terms (e.g. chasing advance payment); Going into administration or liquidation (raising the undesirable possibility of supplier switching costs for the company)

Answer 19

***p.79 2.1*** Sources of information to assess financial stability might include: * **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 could give Hughes and Son an opportunity to ask questions and get some clarifications. **Networking:** - with other buyers who use the same supplier, e.g. at CIPS branch events

Answer 20

***p.77 1.2*** * To deal with suppliers who are financially stable and healthy * If a supplier has financial difficulties the buyer cannot rely on them to be able to fulfil the life of the contract or to maintain a continuous secure stream of supply within a longterm supply partnership * It may lack sufficient liquid funds (cash) to pay suppliers and/or staff in order to fulfull the contract, or it may cease to operate altogether (supplier failure) * If a supplier cannot maintain quality due to having to cut costs in order to survive that wont be acceptable toa buyer if a main criteria for them is Quality. * If the buyer should every have a financial claim against the buyer they would want it to be paid out but if the supplier doesnt have sufficient working capital they wont be able to do so * Buyers seek to obtain fair pricing * Pricing must be fair to the buying organisation and fair to the supplier * Negotation of fair prices will revolve around the costs that the supplier must incur in providin gthe goods that are required and its need to make a reasonable profit margin to reinvest in the business (or return to the shareholders to maintain investment) *

Answer 21

***p.79 2.1*** Sources of information to assess financial stability might include: 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 could give Hughes and Son an opportunity to ask questions and get some clarifications. Networking: - with other buyers who use the same supplier, e.g. at CIPS branch events

Answer 22

***p.93 3.1*** Liquidity ratios measure the extent to which a business has the liquid assets sufficient to meet its short term and long term liabilities. Liquid assets include **cash plus other assets** that can quickly be converted into cash, for example amounts owing from debtors or tocks of finised goods which can be sold. In order to survive, a business must ensure it has plenty of cash and other liquid assets so that it can meet its obligations.

Answer 23

p.79 2.1 Sources of information to assess financial stability might include: - * **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 could give Hughes and Son an opportunity to ask questions and get some clarifications. **Networking:** - with other buyers who use the same supplier, e.g. at CIPS branch events

Answer 24

p.91 * *_Gross profit percentage_**:- calculated when a supplier’s gross profit is divided by its sales/turnover and the result multiplied by 100 to give a percentage figure. Normally the higher the gross profit percentage, the more viable the supplier is, but the percentage may vary from industry to industry, and the profitability trends need to be reviewed/explained. A profitable supplier will provide a sense of supply security and commercial flexibility e.g. concessions during negotiations. * *_Operating (or Net) profit percentage:_**- calculated by dividing a supplier’s operating (or net) profit by its sales/turnover and multiplying the result by 100 to give a percentage figure. Again, the higher the operating (or net) profit percentage, the more viable the supplier is, but it may vary from industry to industry, and trends need to be explained. * *_Return on capital employed (ROCE):_**- calculated by dividing the supplier’s operating profit (before interest and tax) by its average capital employed (shareholder funds plus long term loans) and multiplying the result by 100 to express it as a percentage. Again, the higher this figure, the more viable the supplier as it shows how efficiently the supplier is using its capital. The return a company makes on each £ invested – to cover for interest, dividend and reserves. * *_Return on assets:_**- calculated by dividing the supplier’s operating profit by total assets (fixed + current) and multiplying the result by 100 to give a percentage figure. This indicates how well the assets of the company are being used.

Answer 25

***p.77 1.2*** * To deal with suppliers who are financially stable and healthy * If a supplier has financial difficulties the buyer cannot rely on them to be able to fulfil the life of the contract or to maintain a continuous secure stream of supply within a longterm supply partnership * It may lack sufficient liquid funds (cash) to pay suppliers and/or staff in order to fulfull the contract, or it may cease to operate altogether (supplier failure) * If a supplier cannot maintain quality due to having to cut costs in order to survive that wont be acceptable toa buyer if a main criteria for them is Quality. * If the buyer should every have a financial claim against the buyer they would want it to be paid out but if the supplier doesnt have sufficient working capital they wont be able to do so * Buyers seek to obtain fair pricing * Pricing must be fair to the buying organisation and fair to the supplier * Negotation of fair prices will revolve around the costs that the supplier must incur in providin gthe goods that are required and its need to make a reasonable profit margin to reinvest in the business (or return to the shareholders to maintain investment)

Answer 26

p.79 2.1 Sources of information to assess financial stability might include: * **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 could give Hughes and Son an opportunity to ask questions and get some clarifications. **Networking:** - with other buyers who use the same supplier, e.g. at CIPS branch events

Answer 27

p. 91 2.11 Reasons for using profitability as an important criterion in financial assessment of suppliers might include: • Profits attest to a company’s performance -meaning that costs are covered; it is not ‘bleeding’ money in losses; and its long-time survival is assured. • Profits provide the owners with dividends as a return on their investment. This encourages them to continue to invest and maintain the company’s share capital with a high share price. • Profits which are not paid to shareholders (‘retained profits’) can be either reinvested to grow the business or build reserves for future contingencies. Security and continuity of supply -a supplier making profits will give assurance to EML that it is financially stable and can be relied upon. EML’s planned new projects will require the support of suppliers with financial strength and ability to cover their own costs, maintain a strong share price, pay dividends, and invest in research and development.

Answer 28

***p.80 2.4*** • A business summary, payment history and organisation chart • Industry trends and public report/return filings • Financial statements – to facilitate financial analysis/interrogation • Credit limit recommendations – credit worthiness • Credit rating -ability for timely payment or potential risk of default. • Industry comparisons –to compare or contrast with the actual supplier trends • Commercial credit and financial stress scores • Court Judgements – defaults, bankruptcies, Court Judgements -the report would provide EML with information regarding the potential supplier’s debts that have been settled through courts. The credit check report will show debts owed (dates and values, the paid or unpaid CCJs registered against the supplier). Debt settlement via litigation has a substantial impact on the credit rating of the company and this will help EML in its supplier selection/prequalification decisions. (

Answer 29

***p.84 5.4*** Observations that might arise from the information provided by Fig. 1 may include: * The supplier’s day-to-day trading is a healthy generator of cash - its ‘operating activities’ during the year netted a cash surplus of $810,000. Such information might not be apparent from a profit & loss statement. * Three substantial cash outgoings during the year: $42,000 in interest payments, $162,000 in taxation and $117,000 in net expenditure on new fixed assets. All of this reduces the cash surplus to $489,000. * The supplier has decided to pay out $99,000 in dividends to its shareholders, leaving a surplus of $390,000. * By issuing new share capital, the company raised further cash of $48,000 but this is more than offset by the supplier’s repayment of a $450,000 long-term loan (these two are movements in the supplier’s long-term capital funding which is why they are shown together). *  Over the year the company’s cash position decreased by $12,000, from $138,000 to $126,000. However, the supplier is still viable in terms of cash flow.

Answer 30

***p.93 3.1*** * 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. * A supplier must have sufficient cash or ‘liquid assets’ to meet its short-term debts and expenses and thus to maintain its operations and flow of supplies to customers. * A supplier must be able to demonstrate sound cash flow management, with suitable timings for incoming and outgoing cash flows to ensure stability in meeting financial obligations. * Liquidity is a measure of the extent to which a supplier is able to meet its liabilities or debts and therefore impacts on the stability and on-going viability of the business. * Liquidity can contribute to a supplier’s potential to invest in growth and development.

Answer 31

The short term liquidity ratios are above the ideal and therefore a sign of sound financial stability for Bella Seats Ltd. There is also an improvement in these ratios from 2015 to 2016. The profitability ratios also display a profitable organisation. Although there was a drop in the turnover figures, the profitability ratios still show a significant improvement from 2015 to 2016.

Answer 32

p. 93 The following short-term liquidity ratios determine organisation’s ability to meet its short term financial commitments. The current ratio is calculated by dividing current assets (stock, debtors and cash) by the current liabilities (creditors and short term loans). The ideal ratio is 2.0:1 signifying that the current assets can adequately cover the current liabilities. The acid test ratio (or quick ratio) is similar to Current ratio, but excludes stock from the calculation, because stock may be difficult to realise and/or may not achieve its balance sheet value. A ratio above 1.0:1 would signify financial stability as cash and debtors can sufficiently pay off current liabilities. Below are the two-year short term liquidity ratios for Bella Seats Ltd (rounded to 2 decimal places, although other rounding is acceptable): - $(000s) 2015 $(000s) 2016 Current Ratio 4002/1979 = 2.02:1 4260/1916 = 2.22:1 Quick Ratio (4002-1870)/1979 = 1.07:1 (4260-2105)/1916 = 1.13:1

Answer 33

p.91 Below are the two-year gross and net profit to sales percentages for Bella Seats Ltd (rounded to two decimals, but different rounding is also acceptable): - $(000s) 2016 $(000s) 2015 Gross Profit to Sales Percentage (1490/5300) x 100 =28.11% (1426/5956) x 100 =23.94% Nett Profit / Sales Percentage (629/5300) x 100 =11.87% (452/5956) x 100 = 7.59%

Answer 34

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***

Answer 35

* Producer B and Producer C appear are similar sized business with annual sales revenue of $986,443 and $945,200 respectively. * Producer C is producing significantly less oil than producer B - around 37% less. * It is possible therefore that Producer B's costs and pricing are lower than Producer C's or other products may have a bigger role in the annual sales revenue of producer C than B. * Producer B is achieving higher gross profit and operating profit percentages than Producer C. * Producer B's sales and administrative expenses appear to be lower than Producer C's shown by a smaller gap between gross profit and operating profit percentages. * Producer B has a significantly higher operating profit percentage than all the other producers and also the highest level of oil production. * Other relevant comments were also acceptable.

Answer 36

* 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.

Answer 37

Sources of information to assess financial stability might include: * **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 could give Hughes and Son an opportunity to ask questions and get some clarifications. **Networking:** - with other buyers who use the same supplier, e.g. at CIPS branch events

Answer 38

* Profitability calculations – i.e. the operating profit percentage (operating profit divided by revenue and multiplied by 100) for the given years, in order to compare with the industry norm of 25%. * Revenue trend- the general trend in the revenue for the company is gradually declining, apart from the slight increase in the most recent year. * Operating profit trend – it declines after an initial increase for every year shown in the table. * Profitability trend - is at its highest in 2013 at 23% and it declines in each subsequent year, 19%, 16% and 13% in 2016. The data indicates that the financial performance of Fruity Flavours is generally declining in terms of profitability, profit and revenue over the period shown. Even where the turnover increased from £650m in 2015 to £674m in 2016, the profitability still declined, which might suggest the suppliers’ inability to control operating costs. Its operating profit is below the market norm of 25%, which might signal imminent problems such as cash flow shortages mentioned in the case study; reduction in future investment; inability to reduce prices; etc.

Answer 39

**_‘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’.

Answer 40

***p.93 3.2*** For ***short term liquidity*** measures two ratios are available - 1. the **_current ratio_** (or working capital ratio) which should ideally be 2:1 - calculated by dividing current assets (stock, debtors, cash) by current liabilities (creditors, short term loans); A viable supplier would have a current ratio greater than 1:1 (ideally 2:1), which indicates sufficient current assets to pay off current liabilities on demand. A current ratio less than 1:1 is indicates financial instability and therefore a risky supplier. 2. and the **_acid test ratio_** (or quick ratio) which should ideally be 1:1 - calculated like the current ratio but excluding stock from the current assets (stock value is relatively unpredictable and cannot be quickly realised in a desperately dire and urgent liquidity crisis). Where assets do not adequately cover liabilities the indication is that the supplier is financially risky and cannot can readily settle its current liabilities from its cash and debtors For ***long term liquidity*** assessment of the supplier: 1. the **_‘gearing ratio’_**. This ratio identifies the proportion of long term funding from debt/loans to (divided by) owners funding (ordinary shareholder funds plus reserves) – this is expressed as a percentage when multiplied by 100. High gearing implies a dependence on borrowed funds which demand regular fixed interest payments to the lenders – a long term financial risk factor. Calculation: dividing long term debt/loans (fixed return capital) by owners funding (ordinary shareholder capital plus reserves) and the result multiplied by 100 to be expressed as a percentage 2. High gearing means there is a lot of fixed return capital in the overall financial structure of the company, which may be a risk factor in the long term: having to meet regular interest costs of the fixed return loans may plae straib on a company if times become lean 3. A low-geared supplier would therefore generally be considered less risky in the long term

Answer 41

***p.91*** **_Gross profit percentage:_**- calculated when a supplier’s gross profit (sales revenue-cost of sales ie costs of production) is divided by its sales/turnover and the result multiplied by 100 to give a percentage figure. Normally the higher the gross profit percentage, the more viable the supplier is, but the percentage may vary from industry to industry, and the profitability trends need to be reviewed/explained. A profitable supplier will provide a sense of supply security and commercial flexibility e.g. concessions during negotiations. * *_Operating (or Net) profit percentage:_**- calculated by dividing a supplier’s operating (or net) profit by its sales/turnover and multiplying the result by 100 to give a percentage figure. Again, the higher the operating (or net) profit percentage, the more viable the supplier is, but it may vary from industry to industry, and trends need to be explained. * *_Return on capital employed (ROCE):-_** calculated by dividing the supplier’s operating profit (before interest and tax) by its average capital employed (shareholder funds plus long term loans) and multiplying the result by 100 to express it as a percentage. Again, the higher this figure, the more viable the supplier as it shows how efficiently the supplier is using its capital. The return a company makes on each £ invested – to cover for interest, dividend and reserves. * *_Return on assets:-_** calculated by dividing the supplier’s operating profit by total assets (fixed + current) and multiplying the result by 100 to give a percentage figure. This indicates how well the assets of the company are being used.

Answer 42

* **E-requisitioning/ordering/purchasing** –systems to enable Magna to electronically and efficiently collate user requirements, generate orders, process invoices, and maintain records; * **E-catalogues**-availed online by supplier to be viewed by potential buyers. Magna can use them to facilitate standardisation and benchmarking of specifications and prices; * **E-auctions**- trade is executed online, using the buyer’s or supplier’s website or a third party auction site. Magna can use it to efficiently structure and harness supplier competition. * **E-tendering**- Magna could electronically send out specifications and invite tenders, and receive bids. * **Other systems such as:** e-contracting, P2P, EPOS, etc were considered where they were presented relevance to the question. * **Supplier portals and market exchanges**, where multiple buyers and suppliers exchange information about their needs and ability to supply * **Online supplier evaluation data**, which contains information such as third party reports, customer feedback and benchmarking reports

Answer 43

* Cost savings through increased process efficiencies in contract management and less paperwork and less staff time spent on routines. * The development of best practice reflected in better communication - consistent and transparent systems enabling uncompromisable devolution of the sourcing process to non-procurement staff. * Enhanced quality and capability, because the sourcing process is transparent- providing clear criteria to facilitate decision making. * Reduced cycle times in the sourcing process, because by using an e-sourcing tool, the inherent automation enables faster response times. * Wider supplier base -due to the power of internet and greater capacity for data management, new and potentially innovative suppliers are identified for Magna.

Answer 44

Cost savings through increased process efficiencies in contract management and less paperwork and less staff time spent on routines. The development of best practice reflected in better communication - consistent and transparent systems enabling uncompromisable devolution of the sourcing process to non-procurement staff. Enhanced quality and capability, because the sourcing process is transparent- providing clear criteria to facilitate decision making. Reduced cycle times in the sourcing process, because by using an e-sourcing tool, the inherent automation enables faster response times. Wider supplier base -due to the power of internet and greater capacity for data management, new and potentially innovative suppliers are identified for LOCOG.

Answer 45

Primary commodities are traded on dedicated markets or exchanges such as the London Metal Exchange, New York Mineral Exchange (Nymex). This type of market often displays a high degree of price volatility due to the involvement of speculators who are not direct users of materials traded.  Primary commodities are unequally distributed geographically and often involve international sourcing. This introduces a complex set of risks and costs, including currency exchange, transport, differences in legal jurisdictions and language and cultural barriers, etc.  Primary commodities are subject to significant and unexpected fluctuations in price occasioned by such causes as -weather damage, industrial action, war or civil unrest, etc. most of which are difficult to mitigate or seek compensation against. Exchange Rates - EML requirements for commodities like iron, copper, and tin from the international market will face cost uncertainties due to currency value fluctuations. This will require EML to take risk mitigation measures such as negotiating/fixing exchange rates in their contracts for future supplies.

Answer 46

Primary data are collected directly from the source - e.g. customers, suppliers-via field research using such tools as interviews, questionnaires, etc. Secondary data are already in existence – gathered for other purposes – and therefore can generally accessed and collected via desk research.

Answer 47

**Advantages** of tendering/competitive bidding might include: * Fairness and genuine competition between suppliers. * Decisions are soundly based on cost and value for money. * It engages a wide choice of suppliers (particularly if open tendering is used) which may encourage innovative solutions to requirements. * Identifying ‘new’ suppliers that were not previously known to the buyer. * It promotes competition between suppliers that can improve value for money for the purchaser. **Disadvantages** to tendering (particularly open tendering) might include: * 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. * Not appropriate where there is only one supplier available. * Unlikely to be appropriate for very low value purchases (the cost/benefit of competition). * 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.

Answer 48

• Consistency: - of tendering procedures and embed tender best practice in PBL. 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. • Speed and accuracy: e.g. potential suppliers can view the ITT on PBL’s portal; download the relevant documents; Automated analysis/evaluation is fast and accurate and provides quick feedback to bidders. • 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. • Collaboration: E-tendering provides a platform for cross-functional collaboration, facilitating internal communication and data sharing, e.g. by providing single point information on procurement matters. Other functions of e-tendering systems might include archiving, supplier base data management, and even the complete contract lifecycle management including retendering.

Answer 49

Two disadvantages of e-auctions might include: - • 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. • Specification complexities –it may be difficult to ensure that you are comparing like with like. E.g. Nina believes that RecruitOnLine’s offering is technically advanced but this may not make a direct comparison with others. • The initial investment cost for this specialist technology may prove prohibitive.

Answer 50

(a) The benefits of using e-auction system might include: - • 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. • Allows access to wider range of suppliers including international markets as time zone limitations are no longer an issue. • There is unlimited resource and flexibility for the buyers to enter into new markets globally and gather new market intelligence.

Answer 51

* 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. * Other benefits might include: - enhanced quality and capability due to process transparency and clearer data evaluations; compliance with regulatory/organisational requirements e.g. on efficiency,environment, etc.; promote collaboration between departments or regions through ‘virtual organisation’ to increase bargaining power; etc.

Answer 52

The types of competitive tendering might include: * 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 Crown Agents. * Selective or restrictive tendering: the participating bidders will have been pre-qualified on the basis of criteria predetermined by Crown Agents. 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.

Answer 53

* The stages in the tendering process might include: - * Preparation of detailed specifications and draft contract documents, i.e. setting out detailed requirements to potential bidders, so that bids can be accurately costed and directly compared. * Deciding on the type of tender, i.e. whether to use open or selective tendering etc., where not already determined by regulation or company policy. * Determining a realistic timetable for responses. There is urgency in Zingle’s requirement for potential tendering of its flavouring requirements. * Advertising the requirement: the tender procedures to be followed, and timetables for expressions of interest or submission of bids. * Supplier prequalification process, e.g. where Zingle has chosen a selective tender process, this might involve sending out Pre-Qualification Questionnaires in response to expressions of interest, with a timetable for these to be returned. * Issuing Invitation to Tender (ITT) and tender documentation to those bidders responding to the advertisement or invitation. This documentation should have uniform details and instructions to bidders regarding: - specifications; quantities; pricing; award criteria; timescales; contract terms; etc. * Submission of completed tenders by potential suppliers, in the prescribed manner and within the deadline specified to ensure consistency and compliance of the process. * Opening of the tenders on the appointed date, and witnessed by appointed officers from procurement and other functions like finance dept. Any tenders received after the submission date should be returned unopened and no tender should be opened earlier than scheduled. * Logging of received tenders, with the main details of each listed on an analysis sheet or spreadsheet, to make comparison simple. Tender details should be kept strictly confidential with access confined to authorised personnel. * Analysis of each tender, according to the stated criteria to determine the best offer, usually related to lowest price, or best value. Environmental sustainability, for example, may be taken into account by Zingle as implied in the case study. * Post-tender clarification, verification of supplier information and/or negotiation, where required. The invitation to tender should state clearly that beside the lowest price, Zingle will conduct post-tender negotiation to clarify tenders or to discuss potential improvements or adjustments. * Award of the contract and notification of the award. Award of the contract is clearly the main objective of the tendering process and the successful bidder needs to be formally made aware of the contract award. * De-briefing unsuccessful tenderers to enable them to improve their competitiveness in future bidding. This may also help to improve Zingle’s future tender processing.

Answer 54

The basic fundamentals of the supply market such as: - * The number and structure of buyers in the market * The number and structure of suppliers in the market * The degree of product differentiation in the market * Methods of pricing in the market * Other micro and macro environmental factors influencing the market, e.g. technology, politics, etc. A clear understanding of these factors will help an organisation like Hughes and Son to determine its negotiating position, e.g. a monopolistic supply market militates against any supplier switching strategy. On the other hand, many suppliers or many products will encourage competition and price reductions. Although the supply market of Hughes and Son may have many potential suppliers the requirement for knowledge of the oil and gas industry and international experience may become a limitation to some.

Answer 55

FOUR sources of secondary data on suppliers and the supply market might include: * Websites, including business directories and listings and searchable databases designed to promote trade or exports. * Published listings of suppliers and stockists in general or specialist directories and registers, e.g. Kompass and Kelly's directories. * Financial and trade/industry press (newspapers, magazines, journals and bulletins) such as Supply Management and Financial Times. * Published economic indices, such as the consumer price index (CPI), the labour market index and various commodity price indices. * Published statistical surveys and reports from the government, examples being Social Trends, Economic and Labour Market Review, British Business and Business Monitor. * Organisations promoting trade, such as trade associations, Chambers of Commerce, embassies and professional institutes. * Price-listing and price comparison websites, which allow the gauging of market prices.

Answer 56

***p168 2.18***

Answer 57

***p.168 2.19***

Answer 58

* 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. fair- trade products * Support domestic businesses for economic and social sustainability and public relations benefits.

Answer 59

* Restriction on anti-competitive conduct- the stifling of competition, e.g. through cartels, monopolies, mergers, etc. * Protecting the rights of minority groups – to provide equal opportunity and diversity in employment; outlawing discrimination on grounds of sex, marital status, race, colour, etc. * Protecting the rights of employees – issues like workplace health and safety; working hours and leave entitlement; flexible working arrangements; rights of consultation for worker representatives, equal treatment of part-time workers, etc. * Protecting the rights and safety of consumers -the outlawing of unfair contract terms; regulation on product health and safety, etc. * Enforcing environmental protection standards -covers issues like air and water quality, climate change and greenhouse gas emissions; biodiversity; use of pesticides and hazardous chemicals and waste management, etc. * Restricting the types of products – covering the supply of dangerous goods or materials -e.g. the use of poisonous lead in paints. * Restricting the uses to which firms can put personal data, e.g. forbidding the passing on of customer details to other organisations without their consent. * Enforcing good corporate governance e.g. via corporate finance and tax law as well as voluntary regulation. * Preventing corruption – covers prevention of money laundering or investing funds derived from criminal conduct or terrorist activities. * International sourcing restrictions – compliance issues related to: Import / export documentation; duties and tariffs; Payment mechanisms and the use of incoterms * International sourcing (Applicable Law) – different countries having different legal frameworks, e.g. on H&S, IPR, employment, etc. These differences must be put into consideration and expressly embedded in the contract e.g. stipulation on which law should apply in case of legal dispute arising from the contract.

Answer 60

* **Open tender procedure** –this is the primary procedure for the public sector where any potential supplier may participate. Its advantage is that it opens the business to the widest supplier base and maintains a maximum transparency and open competition, with the potential to achieve competitive value solutions. The main disadvantage is the lack of pre-qualified suppliers and the high volume of bids to process. * **Restricted procedure** - the initial advertisement (in the OJEU) is for pre-qualification-the potential bidders are required to respond to a pre-qualification questionnaire. A shortlist of suitable suppliers - normally between 5 and 10, is then invited to bid. The advantage of pre-qualifying and shortlisting suppliers, prior to the bidding process, is that it minimises the administrative burden on procurement staff and on suppliers. * **Under a negotiated procedure** -the tender may be conducted without an (OJEU) advertisement in strictly defined circumstances, e.g. urgency, sole supply, security, intellectual property, etc. If an advertisement is used, a minimum of three parties must be selected to participate in negotiations, on the basis of the statedaward criteria. Extreme caution is required in using this procedure to ensure that competition and best value objectives. The procedure is unlikely for NEPC's laundry services contract as there are potentially many suppliers in the market. * **Competitive dialogue procedure** – this procedure is designated for large, complex projects -such as Private Finance Initiatives (PFI) or Public Private Partnership (PPP) projects. In these projects, the requirements and pricing cannot be predetermined clearly - specifications may change during the project period and solutions revised in collaboration with the supplier. The requirement is advertised (in OJEU) and the buyer opens a dialogue with pre-qualified suppliers to identify and define the best suited contractual solutions. After defining the solution, the suppliers are invited to submit final tenders. This procedure would not be appropriate for NEPC's laundry services contract which is definable and is relatively small.

Answer 61

The de-briefing topics might include: * 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. * The supplier might not have adequate facilities and equipment to cover changes in (e.g.) quantities, delivery times or quality levels. * Reliance by the supplier on subcontractors and the adequacy of control arrangements. * Cost and schedule control may be inadequate meaning that costs might increase without warning or deliveries might change. * The supplier’s industrial relations record might not be good, meaning that strikes and production stoppages might occur. * Quality management systems may be inadequate meaning that quality problems and product faults might occur without warning. * The supplier’s contract terms might be at odds with the buyer’s terms meaning that disputes might occur during the contract provision. * The supplier’s after-sales service and support offering might not meet the buyer’s requirements

Answer 62

* An exchange rate is the price or value of one currency expressed in terms of another currency. Exchange rates can therefore fluctuate due the forces of demand and supply. Exchange rate fluctuations represent a financial risk for international sourcing since the supplier will normally quote a price in its own currency -the buyer will need to purchase the currency to pay for the goods. Any weakening of PBL’s domestic currency after agreeing on price and before payment will increase the amount required to purchase the required foreign currency – thus the imports will become more expensive. PBL would rather want the domestic currency to appreciate in value so that less money is required to purchase the foreign currency – thus the imports will be cheaper.

Answer 63

b) PBL can manage currency and exchange rate risk in any or a combination of the following: - * 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. * If exchange rate risks are severe, a purchaser may have to consider temporarily sourcing from the domestic market, from a single currency market such as the EU, or from other markets with less volatile currencies. * PBL may sell its vehicles to customers in other countries and acquire foreign currency need to pay for imports from those countries or elsewhere financially convenient. * PBL may agree with its suppliers that all transactions will be made using a third currency that may be more stable than the currency of either party. This means that exchange rate risk may be shared.

Answer 64

* 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. * The law applicable to the contract – as the goods travel between the different legal jurisdictions * The agreement of contractual terms including and the implications of ‘Incoterms’ * The need to reconcile product and trade standards on quality, ethics, CSR, reputational risk, etc.

Answer 65

* 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. * Management will be able to show that larger purchases have been made based on value and competitiveness.

Answer 66

* The supplier’s working practices with regard to forced labour. Grocery Grande 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 Grocery Grande. * Evidence of bribery corruption within the supply chain could also damage Grocery Grande’s reputation. * Grocery Grande might use the Dow Jones Watch or other available tools to identify red flags or warning signals for companies that might be ethically exposed. e.g. in connection with the conflict between HR and rocurement regarding the procurement policy for value above $5000 threshold.

Answer 67

* A letter of credit is a written commitment by the buyer’s bank (issuing bank) to pay a specified sum to the supplier’s bank (advising bank). Crown Agents would instruct its bank to open credit with the supplier's bank which the opens in favour of the supplier. The supplier can draw on that credit and obtain payment in exchange with shipping documents specified in the Letter of Credit (e.g. a clean bill of lading, an insurance policy, a commercial invoice, certificate of origin, etc.). The advising bank obtains reimbursement from the buyer’s bank in exchange with the shipping documents which are then forwarded to the buyer in exchange with the amount of the letter of credit. * The purpose of using letters of credit is to provide confidence to the parties in the transaction by using their banks as intermediaries in order to avoid any potential for costly litigation or arbitration. From Crown Agents point of view payment is only made after receiving ownership of the goods title/documents. The supplier is also safe as it releases those documents in exchange with payment from the advising bank. Letters of credit, therefore, protect both parties in a contract.

Answer 68

* The purpose of Incoterms is to specify the obligations of the buyer and seller in regards to the delivery point, and responsibility for insurance, freight and documentation. Incoterms do not cover the cost of the product itself nor the payment method. * Questions that Incoterms seek to address include: * Where delivery should be made * Who is responsible for paying transport costs * Who is responsible for paying any import duties * Who is responsible for insuring the goods in transit * What level of insurance is requiredWhich party raises particular documents * Incoterms are structured in four broad groups, i.e. E, F, C, D and are typically identified by three letter acronyms, for instance some of the common incoterms in each group are EXW, FOB, CFR, DDP. There are a total of 11 incoterms each representing increasing responsibility/risk for the exporter (or decreasing

Answer 69

* **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 buyer's country of operation is a member which might significantly impact on the final cost of the purchases; * **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. the buying organisation 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 buying organisation and its suppliers. the buying organisation might prefer 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. * **Applicable law**: the supplier’s country law will be different from the law of the buyer’s country. It is essential to establish whose country’s law will apply to the supply contract. The Rome Convention allows contracting parties to agree on which country’s law governs the contract (that of the supplier or that of the buyer) in case of any incidental dispute, otherwise such dispute may be inferred from the nature of the contract and the prevailing circumstances. The buying organisation might be interested to ensure that its international contracts are governed by the law of its country. * **Ethical sourcing and fair trade policies**: this is an ‘organisational’ consideration. The buying organisation will have to ensure that its suppliers have in place robust ethical policies (which should preferably embrace Ethical Trade Initiative) to mitigate the risk to potential reputational damage. Social and environmental working conditions, standards and legislation may differ in the country of supply and therefore must be verified due their impact on the image of the business; the buying organisation should consider whether its trading behaviours and those of its suppliers meet ethical trading standards internationally; * **Currency and exchange rate risks**; the buying organisation has to consider the potential risk of financial loss due to currency and exchange rate fluctuations, e.g. due to a negative shift in the exchange rate in the period between the signing of a contract and effecting payment. The buying organisation might consider mitigating this risk by negotiating a price in its own currency (although this might be difficult), or by entering into a forward foreign exchange rate contract with its bank (for a small fee, the bank could guarantee to supply the currency to the buying organisation at the current exchange rate). Payment terms should state the currency, mode and timing of payment in order to mitigate the risks associated with currency fluctuations; * **Cultural considerations** – international laws and attitudes to bribery, corruption and diversity – the buying organisation needs to ensure that the foreign supplier understands what is and is not acceptable to them; * **Quality standards** – due to differences in national standards it may be necessary to engage third party inspection/certification of the products to ensure that they conform to the required specification or internationally recognised standards.

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