D3 Exam Questions Flashcards

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1
Q

1

  • Supplier 3 is described as a small firm or enterprise.*
  • *(a) Explain THREE advantages that BS might obtain by sourcing the mountain bikes from a small firm such as Supplier 3.**

(10 marks)

January 2014

View Exam Moderator answers

A

p.65 2.6

  • Access to a wider/inclusive market that is not merely confined to large suppliers
  • Potentially lower prices due to lower overheads associated with smaller organisations;
  • Shorter decision making channels due to absence of bureaucracy;
  • Greater flexibility and responsiveness especially in small order situations;
  • Greater commitment as BS is likely to be a core customer;
  • Small suppliers are usually local (as Supplier 3 is) with shorter supply chain advantages in transport/logistics and communication; etc.
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2
Q

1

Supplier 3 is described as a small firm or enterprise.

(b) Explain TWO disadvantages that BS might encounter by sourcing the mountain bikes from a small firm such as Supplier 3.

(10 marks)

January 2014

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A

p.65 2.5

  • Lack of expertise to understand or interpret complex requirements
  • Lack of capacity for larger order volume contracts where the trend is toward aggregate of demand into fewer larger contracts, the use of framework agreements and a reduced supplier base
  • Financial instability which might compromise supplier performance or debase the contractual terms on payment (chasing early payment), quality(cutting corners), lead times (stock outs), etc;
  • Lack of economies of scale hence higher costs/prices;
  • Perceptions and attitudes that are averse to structured business approach employed by the company –e.g. tendering processes, credit terms, etc;
  • Lack of expertise, time or resources for marketing, research and development to ensure future supply continuity
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3
Q

1

a) Explain the term ‘sourcing’.

(4 marks)

March 2014

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A

p.2 1.3

It is a pre-contract procurement process that is concerned with ‘how and where the products or services are obtained’; the process of identifying, selecting and developing suppliers; etc.

It can be carried out at 2 basic levels: (a) tactical and (b) strategic

Tactical sourcing would be:

  • Lower level decisions relating to low profit, low risk and routine items.
  • Also includes short-range decisions as to how specific supply requirements will be met in response to changing or temporary conditions in the organisation or supply market
  • Clearly defined requirements and specifications and transactional sourcing decisions based mainly on open bidding and purchase prices.

Strategic sourcing processes are concerned with:

  • Top level, longer terms decisions relating to items with high profit and high supply risk
  • The formulation of long range decisions about procurement policies, the supplier base, supply chain relationships, the purchase of capital equipment and ethical sustainability issues
  • Developing a deep understanding of requirements (eg using value analysis) and of the supply market and individual supplier drivers and capabilities
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4
Q

1

b) Describe FOUR stages of the sourcing process that might be used by LOCOG.

(4 marks)

March 2014

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A

p.3. 2.1

  • Identification of the requirement or need – the specification, the quantities, whether a new requirement or a rebuy/replenishment, etc.; This may take the form of a purchase requisition from a department or a stock replenishment from inventory control or a requirement definition due to ESI or EBI involvement in the design process. Could also be due to re-evaluation of needs and the definition of requirements in product and service specifications
  • A sourcing plan – This would include make/do or buy decisions and a definition of the type of purchase ie new, re-buy or modified re-buy. The buying team would refer to the existing sourcing policy or determine the sourcing strategy or methodology to apply - e.g. single or multiple sourcing; whether to use competitive tendering or direct negotiation; whether to source locally or internationally; establishing the award criteria, contractual requirements and processes; etc.
  • Market analysis- this would involve analysing demand and market patterns; identifying new potential suppliers; general risk assessment by evaluating the business environmental factors.
  • The identification and/or pre-qualification of suppliers – using available sources of data on supply sources (existing and potential suppliers); applying key criteria (technical, financial, commercial, etc) to pre-screen and determine suitable suppliers who meet LOCOG’s standards; engage the identified supplier using appropriate tools such as PQQ or RFI, RFQ or ITT, depending on the sourcing process or methodology adopted. Some answers divided this stage into two – identification and pre-qualification – and marks were earned appropriate to the depth of detail presented.
  • Evaluating supply offers /options – depending on the methodology adapted, LOCOG would receive (from pre-qualified suppliers) quotations or tenders/bids for evaluation against the established criteria and /or enter into negotiations with one or more of the suppliers. The ‘winning’ supplier would be the one offering the best value solution to the requirement – candidates with public sector background seemed to favour the term ‘MEAT’ (Most Economically Advantageous Tender).
  • Creating contractual relationship – this would be the final stage of the process when all clarifications have been made a purchase order/contract/framework agreement or other method of legal relationship is formulated and adopted by both parties.
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5
Q

1

(b) Discuss whether competitive tendering would be an appropriate method of awarding the contract to one of the international suppliers of liquid monomer

(8 marks)

Jan 2015

View Exam Paper with Case Study

Similar question 15/01, 18/11

A

page 32 table 2.2

Competitive tendering might achieve the lowest price for the company 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:

  • It is impossible to estimate production costs accurately
  • Price is not the only or most important criterion in the award of hte contract
  • Changes to the specification are likely as the contract progresses
  • Special tooling or set up costs are major factors in the requirement
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6
Q

1

(a) Explain FOUR objectives that Vasseem should aim to achieve, if he decides to negotiate directly with the two international suppliers of liquid monomer.

(12 marks)

Jan 2015

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A

page 31 2.10

  • Obtain a fair and reasonable (or advantageous) price for the quantity of goods specified
  • To get the supplier to perform the contract on time
  • To exert some control over the manner in which the contract is performed
  • To persuade the supplier to give maximum co-operation to the buyer’s company
  • To develop a sound and continuing relationship with competent suppliers
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7
Q

The case study states that Francois believes that the Ministry should have developed a collaborative partnership approach to sourcing with the three suppliers of the IT equipment.

Outline FIVE benefits for the Ministry of developing this type of approach.

(20 marks)

March 2015

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A

p. 29 table 2.1

  • Greater stability of supply and supply prices
  • Sharing of risk and investment
  • Better supplier motivation and responsiveness, arising from mutual commitment and reciprocity
  • Cost savings from reduced supplier base, collaborative cost reduction
  • Access to supplier’s technology and expertise
  • Joint planning and information sharing, sharing supporting capacity planning and efficiency
  • Ability to plan long-term improvements
  • More attention to relationship management eg access to an account manager
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8
Q

1

A report entitled ‘Review of Efficiency in the Schools System’ published in 2013 found that too many schools continue to purchase products and services individually.

Describe THREE advantages and TWO disadvantages of schools adopting a consortium or group buying approach to sourcing their requirements from suppliers.

(20 marks)

May 2015

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A

p.42 4.26

ADVANTAGES

  • By means of enhanced bargaining power, the consortium can obtain discounts that would not be available to individual members - although there may be difficulties in allocating such discounts fairly among them
  • A consortium can establish framework agreements, simplifying purchase administration for members. This can lead to significant reductions in transaction and contracting costs, especially in the case of low-value items where the admin cost is disproportionate to the purchase price of the items.
  • Consortium members can pool expertise, knowledge and contacts, where these would be beneficial for particular procurement categories or exercises

p.42 4.27

DISADVANTAGES

  • There are costs and effort associated with communication and coordination, staff development and policy development
  • There is an issue of transparency between consortium members. Buyers need full information about plans, processes, designs and costs in order to make informed procurement decisions: this may expose some members of a consortium to commercial or intellectual property risk
  • Consortia may suffer from lengthy negotiation and decision processes, which are inefficient and may deter some suppliers from dealing with the consortium
  • Members are not obliged to purchase to the agreed specification
  • Very large consortia may fall foul of laws and regulations designed to prevent dominant marker players from abusing their dominant market position (eg by dictating pricing)
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9
Q

1

Discuss FOUR criteria that GFATM might apply when awarding the contracts to suppliers.

(20 marks)

July 2015

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A

p.57

  1. Ability to conform to specification
  2. Reasons for disqualification
  3. Lowest Price
  4. Best value or ‘most economically advantageous tender’ (MEAT)
  5. Best value and total lifecycle cost
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10
Q

1

b) ESA has three prime contractors, Airbus, Thales Alenia Space and OHB. Below these first tier suppliers are lower tier suppliers, who are specialists in engines and flight systems.

Outline THREE benefits for ESA’s procurement function of adopting a supplier tiering approach to sourcing. (12 marks)

Jan 2016

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A

p.74 4.14

  • There will be fewer commercial relationships to source and manage and develop instead of having to deal with a large number of suppliers.
  • To maintain quality, service and minimise business and reputational risk. However, ESA’s procurement should ‘drill down’ through the tiers - appraising and monitoring policies, systems and performance – thus ensuring sound management of the entire supply chain.
  • ESA may influence first tier suppliers to adopt some of its own suppliers as subcontractors or lower tier suppliers. This will ensure continuity of its own business relationships established in previous contracts where such suppliers demonstrated excellence.
  • ESA’s procurement function will have fewer tasks and have time to pursue a more strategic focus on issues like sustainable sourcing, global sourcing, relationship development, etc.
  • Collaborative partnership with tier 1 suppliers will enable ESA to benefit from their expertise and innovation which is important in ESA’s kind of enterprise
  • It may lead to variety reduction and standardisation of parts and components. This will result in cost savings in handling and storage.
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11
Q

1

a) Explain the term ‘supplier tiering’ in the context of the case study.

(8 marks)

Jan 2016

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A

p. 73 4.8

Additional definition source

Tiering suppliers is a form of supply base management in which suppliers are organised such that only first tier suppliers deal directly with the buying organisation. Second tier suppliers will participate in the same supply chain, but will supply first tier suppliers who will assemble or integrate before supplying the buying organisation. The practice originated in the automotive industry and allowed car assemblers to reduce their first tier supply base to below 1000 suppliers. The practice allows the development of differentiated supply relationships with a smaller community of suppliers. Management contracting is a similar practice in the building and construction sector.

In terms of the case study, ESA is a big organisation with a large number of suppliers. It prefers to deal directly with only a small number of these suppliers, these are first tier suppliers. These tier 1 suppliers are given the responsibility of dealing with and managing the other suppliers, the second tier suppliers.

ESA may have a supply chain with thousands of different suppliers in many different countries. Rather than dealing directly with all of these, it might reduce its vendor base to a few hundred first tier suppliers, who in turn will deal with and manage a second tier and potentially third tier or further tiers of suppliers along the supply chain.

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12
Q

1

(a) Describe FIVE sources of information that could be used by WEL’s procurement team for the appraisal of potential suppliers

(10 marks)

Nov 2016

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A

p. 7 3.2

  1. The buyer’s own database of existing and past suppliers, including records of their offerings, performance evaluations and so on. This can be supplement by the buyer’s lists of preferred, approved or authorised suppliers, indicating which suppliers have been pre-qualified for use
  2. Formal requests for information (RFI), often using pre-prepared questionnaires sent to suppliers who might be of interest
  3. The marketing communications of potential suppliers: advertising, direct mail, brochures and catalogues, visits from sales reps, websites, etc.
  4. Internet search for websites including business directories and listings, searchable databases designed to promoted exports and specialist purchasing resources
  5. Online market exchanges, auction sites and supplier/buyer forums, which may also allow the posting of requests for quotation and other exchanges
  6. Published listings of suppliers and stockists: general directories (eg Yellow Pages) and specialist trade/industry directories and registers
  7. Trade/Industry Press (newspapers, magazines, journals and bulletins) and specialist procurement journals (ie Supply Management or Procurement Professional)
  8. Trade fairs, Exhibitions and conferences
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13
Q

1

  • The case states that WEL’s procurement manager is considering the possibility of entering into partnerships with selected suppliers in order to gain greater benefits.*
    (i) Outline THREE advantages of supplier partnering from the buyer’s viewpoint.

(5 marks)

Nov 2016

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A

p. 29 table 2.1

  • Greater stability of supply and supply prices
  • Sharing of risk and investment
  • Better supplier motivation and responsiveness, arising from mutual commitment and reciprocity
  • Cost savings from reduced supplier base, collaborative cost reduction
  • Access to supplier’s technology and expertise
  • Joint planning and information sharing, sharing supporting capacity planning and efficiency
  • Ability to plan long-term improvements
  • More attention to relationship management eg access to an account manager
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14
Q

1

  • The case states that WEL’s procurement manager is considering the possibility of entering into partnerships with selected suppliers in order to gain greater benefits.*
    (ii) Outline TWO disadvantages of supplier partnering from the buyer’s viewpoint.

(5 marks)

Nov 2016

View Exam Moderator answers

A

p. 29 table 2.1

  1. Risk of complacency re cost/quality
  2. Less flexibility to change suppliers at need
  3. Possible risk to confidentiality, intellectual property (eg if supplies also supply competitors)
  4. May be locked into relationship with an incompatible or inflexible supplier
  5. Restricted in EU Public Sector Procurement Directives
  6. May be locked into relationship, despite supply market changes and opportunities
  7. Costs of relationship management
  8. Mutual dependency may create loss of flexibility and control
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15
Q

1

(a) Explain how EML could use the elements of a procurement positioning matrix, such as the Kraljic matrix, to assist its sourcing process. (12 marks)

Jan 2017

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A

p. 5 2.11

Kraljic identifies four types of requirements/items based on value (importance) and supply risk (complexity) effects on the procurement strategy of an organisation as follows:

Non-critical or routine items: are low value/low risk e.g. stationery, which should be processed via low- maintenance sourcing routines such as vendor-managed inventory, blanket ordering and e-procurement.

Leverage items: are high value /low risk where EML should use its buying power to secure best prices and terms by using standardisation, competitive bidding and multi-sourcing/supplier switching.
Bottleneck items: the priority for these high risk/low value items is supply security which is achievable via negotiation, long term contracts, multi-sourcing (back-up contracts), incentives/penalties; and safety stock.
Strategic items: such as major pieces of machinery are high value/high risk. EML should pursue long term collaborative partnership - mutual dependency and investment, total cost focus, etc. The sourcing process
will need to be rigorous to develop and maintain the ‘right’ supply chain partners.

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16
Q

1

(b) Suggest FOUR examples of information about existing suppliers that might be found on the EML supplier database and used as part of EML’s supplier pre-qualification process.

(8 marks)

Jan 2017

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A

p.8 table 1.1

Pieces of information about existing suppliers might include the following:

  • Contact details – this would show whether the supplier was international or domestic
  • Terms and conditions of trade including prices and preferred currency
  • Approved or preferred status of the supplier
  • Average value and frequency of spend with each supplier
  • Special capabilities (e.g. late customisation capability) suggesting selection when special needs arise
  • Results of supplier appraisals, audits and ratings
  • Vendor performance history (quality, lead times, delivery, compliance, etc.)
  • Current systems such as framework agreements and/or call-off contracts in place
  • Financial stability of the supplier
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17
Q

1

(b) Describe THREE possible ways in which Steven might involve NEPC’s stakeholders in the sourcing process. (12 marks)

March 2017

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A

p. 9 3.13

  • Early buyer involvement (EBI) - buyers are important in providing commercial input to bring the overall success in the product development and supply sustainability.
  • A formal committee or a team approach –the preparation of a specification involves reconciliation of conflicting objectives. A committee/team (cross-functional/multi-skilled) is formed comprising members from each stakeholder group –e.g. design, quality, procurement, etc.
  • Informal approach –encourage stakeholders to consider both commercial and technical factors affecting their activities; buyers should to challenge the assumptions of users and to suggest alternative methods or solutions; designers and users should seek advice and input before going too far with their initiatives.
  • A purchasing co-ordinator approach –this is a formalisation of the informal approach, with procurement staff appointed as ‘liaison officers’ to co-ordinate the required communication.
  • An early supplier involvement (ESI) -suppliers are involved at an early stage in the product or service development –thus taking advantage of their technical expertise to improve on the design and costs. – suppliers have tremendous expertise in connection with operational methods, EOQs, substitutes, lead times, packaging, supply sustainability, etc. As Steven lacks public sector experience he will greatly benefit from involving suppliers early in his plans.
  • Other appropriate ways - e.g. consultation, focus groups and surveys.
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18
Q

1

(a) Briefly describe FOUR stakeholders that Steven might engage with, as part of NEPC’s sourcing process. (8 marks)

March 2017

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A

p. 9 3.12

a) Stakeholders in NEPC that Steven might engage with as part of the sourcing process might include:

  • Users of the items being sourced – e.g. consultants, doctors and nurses, who have a clear understanding of the desired functionality of the required items.
  • Finance department, to advise on budgetary concerns especially in capex situations where specialist investment appraisal techniques are required.
  • Design function members will be important in contributing to the preparation of the product or service specification
  • Suppliers, are likely to have the expertise to contribute to design and specification, sustainability plans and costs
  • The quality management team, which will be able to ensure that items being sourced are fit for purpose
  • Any other relevant internal or external stakeholders - e.g. the management boards of the NHS Trusts themselves.
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19
Q

1

a) Explain the nature of ‘strategic’ purchases and their likely impacts on CHL’s sourcing process. (10 marks)

May 2017

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A

p. 3
a) ‘Strategic’ items are highly important and their supply market is characterised by scarcity and high complexity. The items are usually of high value and used over a long time.

The impact of such items on the sourcing process might include:

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

The sourcing process will be rigorous – with stakeholder
involvement, wide market research including international sources, supplier prequalification, etc. – to find a supplier who can satisfy CHL’s need for installation, service and maintenance.

Include some procurement positioning concepts such as Kraljic matrix,

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20
Q

1

b) Explain the term ‘supplier pre-qualification’ and how it might assist CHL’s sourcing process.

May 2017

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A

p. 11 4.2

Supplier pre-qualification’ is the definition and assessment of criteria for supplier suitability.

  • The development of objective evaluation criteria by which suppliers’ suitability will be appraised.
  • The screening of potential suppliers against the defined criteria via a PQQ, RFI, etc.
  • Pre-qualification may assist sourcing process by saving time and effort or cost as follows:
    • Only suppliers meeting the minimum standard/criteria are invited to participate in a sourcing process.
    • It facilitates the preparation of an approved supplier list.
    • It will be suitable for a specialised type of requirement being considered by CHL.
    • It is carried out to pre-screen suppliers to receive an invitation to tender or to quote for a contract.
    • It will help to embed qualitative selection criteria in the supplier selection process.
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21
Q

Q1 The case study information states that ZSL’s new approach to sourcing is to use several suppliers, or multiple sourcing.

(b) Describe TWO disadvantages to ZSL of a multiple sourcing approach, compared to single sourcing. (8 marks)

July 2017

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A

p.26 1.7

  • They can lead to unnecessarily high procurement costs.A large supplier base means more small orders and higher transaction and admin costs: giving large orders to fewer suppliers, on the other hand, would secure volume discounts and other savings( eg through systems integration with key suppliers)
  • They fail to exploit the value adding and competitive potential of concentrating on more collaborative relationships with fewer suppliers (eg continuous improvement over time, co-investment in innovation and quality, better communication and integration and so on)
  • They can lead to waste, by retaining suppliers who cannot ( or can no longer) meet the firms’ requirements, or are otherwise not often used - and perhaps by increasing stock variety and proliferation, where different suppliers have slightly different products (so that ordering from multiple suppliers works against standardisation, variety reduction and inventory reduction)
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22
Q

1

The case study information states that ZSL’s new approach to sourcing is to use several suppliers, or multiple sourcing.
(a) Describe THREE advantages to ZSL of a multiple sourcing approach, compared to single sourcing. (12 marks)

Jul 2017

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A

p.26

  • If there is a supply shortage or disruption (because of political unrest or bad weather in one supplier’s area) or unforeseen peaks in demand (creating a need for extra supply), or a supplier failure, the organisation has established relationships with a wide range of approved alternative suppliers
  • As circumstances change - for both buyer and supplier - suppliers may become more or less compatible with the buying organisation, and mor or less competitive in terms of their offering. Increasing the rage of pre-qualified potential suppliers enables the buyer to be more opportunistic: taking advantage of the best available price, trading terms, quality, innovation and flexibility on offer at any given time.
  • It is likely to keep the supplier base competitive, as each supplier knows that it is competing for contracts with a number of other sources of supply.
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23
Q

1

(a) Explain with the aid of a suitable diagram the term ‘supplier tiering’.

(5 marks)

November 2017, Jan 2016

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A

p.73

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24
Q

1

(b) Explain THREE possible consequences for PBL if it decides to ‘tier’ its supply chain.

(15 marks)

November 2017

(Similar questions Jan 2016)

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A

p.74 4.14

  • There will be fewer commercial relationships to source and manage and develop instead of having to deal with a large number of suppliers.
  • To maintain quality, service and minimise business and reputational risk. However, the procurement team should ‘drill down’ through the tiers - appraising and monitoring policies, systems and performance – thus ensuring sound management of the entire supply chain.
  • The company may influence first tier suppliers to adopt some of its own suppliers as subcontractors or lower tier suppliers. This will ensure continuity of its own business relationships established in previous contracts where such suppliers demonstrated excellence.
  • The procurement function will have fewer tasks and have time to pursue a more strategic focus on issues like sustainable sourcing, global sourcing, relationship development, etc.
  • Collaborative partnership with tier 1 suppliers will enable the company to benefit from their expertise and innovation which is important in the company’s kind of enterprise
  • It may lead to variety reduction and standardisation of parts and components. This will result in cost savings in handling and storage.
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25
Q

1

(a) Describe FOUR potential benefits for Naturally Me when sourcing from small businesses rather than larger suppliers.

(12 marks)

Jan 2018, Jan 2014

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A

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)
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26
Q

1

(b) Explain how ethical issues may affect sourcing from Naturally Me’s suppliers. (8 marks)

Jan 2018

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A

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)
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27
Q

1

The case study states that Grocery Grande had experienced a poor service from the recruitment agency EmployUS, which resulted in a negative effect on staff resources.

Explain FOUR areas that an organisation, such as Grocery Grande, might use to monitor the performance of its suppliers. (20 marks)

March 2018

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A

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
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28
Q

1

Crown Agents helps clients to adopt a strategic sourcing approach by providing advice on a range of subjects, including the measurement of supplier performance.
Describe FIVE criteria that Crown Agents’ clients may use to monitor and measure the performance of their suppliers. (20 marks)

May 2018, Mar 2018

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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.
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29
Q

1

(a) Explain the nature of ‘strategic’ purchases and their likely impacts on Zingle’s sourcing process.
(10 marks)

July 2018

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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.

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30
Q

1

(b) Explain how the adoption of ‘supplier pre-qualification’ might assist Zingle’s sourcing process.
(10 marks)

July 2018

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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.

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31
Q

1

Assess whether competitive tendering might be an appropriate method of awarding the contract for the marketing package. (20 marks)

Nov 2018, Jan 2015

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A

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.

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32
Q

2

(a) It will be important for WEL to be sure that new suppliers will have sufficient technical capability to be able to supply the requirements for the new contract.

Describe FIVE criteria that WEL could use to satisfy itself that new suppliers will have this technical capability.

(10 marks)

Nov 2016

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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
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33
Q

2

Explain FOUR criteria that EML’s procurement manager may use to assess a potential supplier’s systems and procedures, as part of its supplier selection process. (20 marks)

Jan 2017

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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.

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34
Q

2

a) Outline FIVE supplier selection criteria that CHL’s procurement manager might use when selecting suppliers.

(10 marks)

May 2017

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A

p.50

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35
Q

2

b) Financial checks on potential suppliers are important selection criteria for the identification and qualification of appropriate suppliers.

Explain TWO financial checks that CHL’s procurement manager could use when sourcing suppliers.

(10 marks)

May 2017

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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 –
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36
Q

2

The case study information states that ZSL’s procurement team was able to help the other business functions identify appropriate award criteria.
Explain FOUR criteria that ZSL might use in its contract award process. (20 marks)

July 2017, July 2015, May 2015

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A

p.57

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37
Q

2

(a) Explain TWO benefits for PBL of pre-qualifying potential suppliers before engaging them in a tender process. (8 marks)

November 2017

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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.

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38
Q

2

(b) Describe FOUR criteria that PBL may use to pre-qualify potential suppliers. (12 marks)

November 2017

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A

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.
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39
Q

2

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

(20 marks)

March 2018

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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.
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40
Q

Explain the main content of a sourcing plan

(20 marks)

May 2014

  • Explain FOUR elements that Ben might include in his sourcing plan (12-20) 2014/01, 2015/03, 2015/07, 2017/03,2018/07
A

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.
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41
Q

Selection Criteria

  • Suggest 5 Selection Criteria (20) 2014/03, 2014/01
  • Discuss FOUR appropriate selection criteria to assess potential new suppliers in order to increase competition. (20) 2016/01
  • Describe a range of appropriate selection criteria to inform the identification of appropriate external suppliers (10) 2016/11, 2014/07
  • Describe FIVE selection criteria that the procurement function might use when developing its supplier base. (20) 2014/05
  • Outline FIVE supplier selection criteria that the procurement manager might use when selecting suppliers.​ (10) 2017/05
  • Explain FIVE selection criteria that the team might use to identify suitable suppliers (20) 2018/1, 2018/05, 2018/11
A

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.
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42
Q

3

(a) Explain why it would be important for Geri to assess the financial stability of the three potential suppliers before the award of a contract

(10 marks)

January 2014

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A

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.
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43
Q

-03

(a) Explain why Magna Racing should appraise the financial position of its suppliers.

(10 marks)

May 2014

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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)
44
Q

3

(a) Explain TWO reasons why Vasseem should scrutinise the accounts of the two potential international suppliers.

(10 marks)

Jan 2015

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A

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)

45
Q

3

(a) Describe FOUR sources of information that the Ministry might have used when assessing the financial stability of the three new suppliers, before awarding the contracts.

(12 marks)

March 2015

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A

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

46
Q

3

(a) The case study information states that when schools source from local small and medium sized enterprises (SMEs) the financial standing of suppliers is only rarely assessed.

Explain TWO reasons why the financial standing of suppliers should be assessed before the award of a contract.

(10 marks)

May 2015

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A

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)
      *
47
Q

3

  • The case study information states that the move towards using smaller local suppliers would need to be managed carefully in order to ensure the suppliers’ financial stability.*
    (a) Describe THREE sources of financial information about suppliers which could be used to assess their financial stability.

(9 marks)

July 2015

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A

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

48
Q

3

  • The case study information states that the move towards using smaller local suppliers would need to be managed carefully in order to ensure the suppliers’ financial stability.*
    (c) Explain the significance of liquidity ratios to GFATM in assessing the financial stability of a supplier.

(5 marks)

July 2015

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A

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.

49
Q

3

The case study information states that it is essential thatESA’sbuyers consider the financial stability of suppliers.

a) Outline FOUR sources of information on suppliers’ financial performance that ESA’s buyers might use to ensure that their suppliers are financially stable.

(12 marks)

Jan 2016

View Exam Moderator answers

A

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

50
Q

3

The case study information states that it is essential that ESA’s buyers consider the financial stability of suppliers.

b) Describe TWO ratios that ESA’s buyers might use to establish whether a potential supplier is financially stable in terms of its profitability.

(8 marks)

Jan 2016

View Exam Moderator answers

A

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.
51
Q

3

(a) Explain TWO reasons why WEL should appraise the financial position of potential suppliers as part of its supplier appraisal process

(8 marks)

Nov 2016

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A

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)
52
Q

3

(b) Outline FOUR sources of financial information that WEL might use to carry out financial appraisals of potential suppliers.

(12 marks)

Nov 2016

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A

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

53
Q

3

  • *(b) Explain TWO reasons why the profitability of suppliers would be an important criterion in** EML’s
  • *financial assessment of suppliers. (10 marks)**

Jan 2017

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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.

54
Q

3

(a) Outline FIVE examples of information that should appear in a report from a credit rating agency
to assist EML’s sourcing decision. (10 marks)

Jan 2017

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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.
(

55
Q

3

a) Explain THREE observations on the supplier’s financial position that arise from analysing the content of the supplier’s cash flow statement (figure 1).

(12 marks)

May 2017

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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.
56
Q

3

b) Explain TWO reasons why it would be important for CHL’s procurement manager to assess a potential supplier’s liquidity and not just its profitability.

(8 marks)

May 2017

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A

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.
57
Q

3

(b) Describe TWO short-term liquidity ratios that ZSL’s procurement team might use to establish whether a potential supplier is financially stable.

(8 marks)
July 2017

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A

p.93 3.2

58
Q

3

(c) Discuss, using the data provided and the results from the calculations above, the financial stability of Bella Seats Ltd.
(8 marks)

November 2017

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A

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.

59
Q

3

a) Define and calculate TWO key short-term liquidity ratios for Bella Seats Ltd for both years.
(8 marks)

November 2017

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A

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

60
Q

3

(b) Calculate the gross profit to sales percentage and the net profit to sales percentage for both years.

(4 marks)

November 2017

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A

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%

61
Q

3

The case study contains a table showing information on the financial performance of the top five commercial producers of Sherabu oil.

(a) Explain the terms ‘gross profit percentage’ and ‘operating profit percentage’ as used in the table. (8 marks)

Jan 2018

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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

62
Q

3

The case study contains a table showing information on the financial performance of the top five commercial producers of Sherabu oil.

(b) Using the information in the table, comment on the financial performance of Producer B and Producer C.

(12 marks)

Jan 2018

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A
  • 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.
63
Q

3

(a) Evaluate the risks if Grocery Grande does not assess the financial stability of the potential suppliers before the award of a contract.

(10 marks)

March 2018

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A
  • 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.
64
Q

3

(a) Outline FOUR sources of information used to investigate the financial liquidity of potential suppliers. (8 marks)

2018/05, 2018/07, 2018/11, 2017/3, 2017/07

A

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

65
Q

3

(c) Utilising the data shown in the table in the case study, evaluate the financial performance of Fruity Flavours over the period shown and comment on this performance in comparison to the typical industry norms quoted in the case study. (6 marks)

July 2018

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  • 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.

66
Q

3

(b) Explain the terms ‘revenue’ and ‘operating profit’ shown in the table in the case study.
(6 marks)

July 2018

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A

‘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’.

67
Q

Describe TWO financial ratios to establish the liquidity of the suppliers.

(10 marks)

2014/03, 2014/05, 2015/01, 2015/05, 2015/07, 2017/03, 2017/05, 2017/11, 2018/03, 2018/05, 2018/11

  • Explain** the term ‘gearing’, and suggest why it would be important to establish the financial gearing for each of the new suppliers. (8) 2015/03
  • Discuss, using the data provided and the results from the calculations above, the financial stability of Bella Seats Ltd. (8) 2017/11
A

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
68
Q

Explain TWO profitability ratios that the procurement function might use to assess the viability of potential suppliers.

(10 marks)

March 2014

  • Describe TWO ratios that ESA’s buyers might use to establish whether a potential supplier is financially stable in terms of its profitability (8) 2016/01
  • Explain TWO reasons why the profitability of suppliers would be an important criterion in EML’s financial assessment of suppliers. (10 )**2017/01
  • ​**Calculate the gross profit to sales percentage and the net profit to sales percentage for both years (4) 2017/01
  • Explain the terms ‘gross profit percentage’ and ‘operating profit percentage’ as used in the table. (8 marks) 2018/01
A

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.
69
Q

4

(a) Outline FOUR component parts of an e-sourcing system that Franck might introduce into Magna Racing.

(8 marks)

May 2014

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A
  • 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
70
Q

4

(b) Explain THREE benefits that Magna Racing’s procurement function might gain from introducing e-sourcing systems.

(12 marks)

May 2014

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A
  • 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.
71
Q

4

(a) If Vasseem decides to obtain quotations from the two international suppliers, outline SIX pieces of information that he should include in the request for quotation (RFQ) document.

(12 marks)

Jan 2015

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A
72
Q

4

(b) Not all of the criteria for the selection of the international supplier will be of equal importance.

Explain how a weighted points system might be used by Vasseem to evaluate the quotations from the two international suppliers.

(8 marks)

Jan 2015

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A
73
Q

4

(a) The case study states that very little supply market analysis had been undertaken by the Ministry before the three contractors were appointed.

Explain why the Ministry should have undertaken supply market analysis as part of the sourcing process.

(10 marks)

March 2015

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74
Q

4

(b) Describe TWO tools that the Ministry could have used to analyse its supply market.

(10 marks)

March 2015

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A
75
Q

4

(a) Outline FOUR e-sourcing tools that could be used by the schools when sourcing requirements from external suppliers.

(8 marks)

May 2015

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A
76
Q

4

(a) One of GFATM’s first sourcing activities was to carry out the world’s largest tender for the supply of mosquito nets. The organisation aims to follow it up with another sourcing exercise for medical supplies.

Outline FOUR electronic systems that GFATM could use to source its requirements from external suppliers.

(8 marks)

July 2015

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77
Q

4

(b) Explain THREE benefits that GFATM might gain by using electronic systems to source its requirements from external suppliers.

(12 marks)

July 2015

  • Describe FIVE benefits to LOCOG of using an e-sourcing tool, such as the ‘CompeteFor’ web-based portal, in the sourcing process. (20) 2014/03
  • Explain THREE benefits that the schools could achieve by using e-sourcing tools. (12 marks) 2015/05

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A

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.

78
Q

4

(b) Explain ONE potential disadvantage to ESA of having an e-tendering system.

(5 marks)

Jan 2016

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A
79
Q

4

a) ESA has developed an on-line information system for potential bidders, which is the only channel for obtaining access to information to tender documents from the agency.

Describe THREE benefits to ESA of having an e-tendering system.

(15 marks)

Jan 2016

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A
80
Q

4

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

(20 marks)

Nov 2016

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A
81
Q

4

(b) Many of the important purchases made by EML contain commodities, such as iron, copper and tin, and the prices of such commodities may change frequently.
Explain TWO factors that may have an impact on the pricing of commodities. (8 marks)

Jan 2017

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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.

82
Q

4

(a) Explain the differences between primary and secondary data, when gathering information about potential suppliers and markets. (5 marks)

March 2017

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A

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.

83
Q

4

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

(20 marks)

May 2017

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A

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.
84
Q

4

Explain FIVE benefits for PBL in using e-tendering compared to a paper-based tendering system.
(20 marks)

November 2017

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A

• 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.

85
Q

4

(b) Suggest TWO potential disadvantages of introducing an e-auction system as a procurement
tool
for Grocery Grande.

(8 marks)

March 2018

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A

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.

86
Q

4

(a) Outline THREE benefits of using an e-auction system as a procurement tool for Grocery Grande.
(12 marks)

March 2018

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A

(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.

87
Q

4

(a) Assess the potential benefits for Crown Agents in using electronic sourcing in its global operation. (12 marks)

May 2018

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A
  • 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.
88
Q

4

(b) The case study states that most Crown Agents projects have a very sizeable monetary value and therefore it uses tendering extensively to award contracts.
Explain TWO types of competitive tendering that Crown Agents might use. (8 marks)

May 2018

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A

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.
89
Q

4

Suggest and explain FOUR stages that Zingle might include in its tendering process for the procurement of the orange flavouring. (20 marks)

July 2018

  • Describe any FIVE stages of a tender procedure that Julie’s team at Naturally Me might use to select suppliers of Sherabu oil. (20) 2018/01
  • Suggest and justify FOUR stages that ZSL might include in its tendering process for the procurement of the new specially designed boat. (20) 2017/07
A
  • 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.
90
Q

4

(a) Explain why it is important for an organisation, such as Hughes and Son, to analyse its supply markets. (8 marks)

Nov 2018

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A

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.

91
Q

4

(b) Describe FOUR sources of secondary data on suppliers and the supply market that could be used by Hughes and Son. (12 marks)

Nov 2018

  • Outline FOUR sources of secondary data that EML’s procurement manager might use to research potential suppliers as part of the sourcing process. (12 marks) 2017/01
  • Outline FIVE sources of secondary data related to suppliers and the supply market that might be used by NEPC. (15) 2017/03
  • Suggest FIVE sources of data on the supply market that Geri could recommend and explain how each source could assist BS in sourcing its requirements. (20) 2014/01
A

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.
92
Q

5

(b) Describe TWO payment mechanisms that JTW might use to pay for the monomer sourced from an international supplier.

(8 marks)

Jan 2015

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A
93
Q

5

(a) Explain THREE benefits that the schools might gain by using competitive tendering when sourcing from suppliers.

(12 marks)

May 2015

  • Discuss the advantages and disadvantages of competitive tendering in enabling LOCOG to achieve the best value for money. (20) 2014/03

View Exam Paper with Case Study

A

p168 2.18

94
Q

5

(b) Explain TWO disadvantages that the schools might face when using competitive tendering when sourcing from suppliers.

(8 marks)

May 2015

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A

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95
Q

5

(a) WEL’s procurement manager is aware of potential benefits of international sourcing such as lower cost. However, international sourcing may have ethics- related issues. Explain TWO such ethics-related issues.

(10 marks)

Nov 2016

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A
  • 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.
96
Q

4

Explain FOUR legal or political constraints with which EML or its suppliers may need to comply.
(20 marks)

Jan 2017

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A
  • 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.
97
Q

5

  • The case states that a tendering process will be used to award the new laundry services contract.*
  • *Explain FOUR tendering procedures that a public sector organisation** such as NEPC should consider using. (20 marks)

March 2017

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A
  • 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.
98
Q

5

a) When carrying out the tender process, it is considered good practice to de-brief unsuccessful bidders.

Outline FIVE topics that might be included by CHL in the de-briefing process.

(10 marks)

May 2017

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A

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
99
Q

5

(a) ZSL has produced a code of conduct for its suppliers, some of whom are based overseas. The document covers the ethical and environmental requirements with which suppliers must comply.
Propose FOUR requirements that might be included in ZSL’s code of conduct.

(12 marks)
July 2017

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A
100
Q

5

(a) Outline why an understanding of exchange rates will be important for PBL in international supply markets. (8 marks)

November 2017

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A
  • 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.
101
Q

5

(b) Describe THREE ways that PBL might manage currency and exchange rate risks.

(12 marks)

November 2017

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A

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.
102
Q

5

Explain FIVE issues that need to be considered by Naturally Me when importing goods such as Sherabu oil products. (20 marks)

Jan 2018

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A
  • 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.
103
Q

5

(a) Grocery Grande is a private sector organisation; its procurement policy requires all annual commitments in excess of $5,000 to be competitively tendered.
Explain TWO reasons why compliance with the procurement policy is important for
Grocery Grande.

(10 marks)

March 2018

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A
  • 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.
104
Q

5

(b) Explain, using examples, the ethical issues which Grocery Grande should consider when sourcing from an international supplier.

(10 marks)

March 2018

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A
  • 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.

105
Q

5

(a) Explain the use of ‘Letters of Credit’, a payment mechanism of which Crown Agents’ procurement team needs to be aware. (10 marks)

2018/05

  • Explain the meaning of the term ‘letter of credit’ in the context of payment mechanisms to international suppliers. (10) 2017/05

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A
  • 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.
106
Q

5

(b) The case study states that Crown Agents’ procurement team needs a good understanding of Incoterms.

Explain the purpose and use of Incoterms. (10 marks)

May 2018, 2017/07

  • Outline the purpose of Incoterms, including a summary of the main elements that they cover. (10) 2016/11
  • (a) Provide an explanation of the use of Incoterms in the context of sourcing from international suppliers. (12) 2015/01

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A
  • 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
107
Q

5

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

(20 marks)

2018/7, 2018/11, 2016/01, 2015/07, 2014/03

  • Explain the main legislative and organisational requirements that the Ministry should consider when sourcing as a public sector organisation. (20) 2015/03
  • Explain how FIVE legislative or regulatory considerations could impact on BS when sourcing from Supplier 2, an international supplier. (20) 2014/01
A
  • 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.