D5 Exam Questions Flashcards

Question 1

Q

1*

Explain how effective supply chain relationships may help an organisation to improve

(i) The management of costs

(ii) Quality

16/03, 14/05 (10)

Explain: Give reasons for, or account for something, so that it is clear or easy to understand 

Answer

A

(i) The management of costs

The aim of managing costs is to contribute to profitability, increase liquidity and increase returns on investment or capital employed, so managing costs effectively will be the cornerstone of competitive advantage on cost leadership.

Working with suppliers to identify waste and areas where cost improvements could be made using techniques such as whole life costing, tear down analysis and the identification of leverage to reduce costs.

Price management involves managing input costs by ensuring that the organisation secures the optimum price for routine and leverage procurements(competitive price is more important that whole life value for money)

Price analysis – process to determine whether the price offered is fair and appropriate for the goods
Cost analysis – used to support price negotiations where the supplier justifies its price by the need to cover its costs
Price leverage – can be secure3d by means such as aggregating demand or consortium buying, negotiating harder on price.

A wide range of means can also be implemented to contribute to managing costs ie

Value analysis
- Analysing the function of a material, part, component or system to identify areas of unnecessary costs
- Asks:
  - whether the use of the item contributes value
  - Whether its costs is proportionate to its usefulness
  - Whether all its features are actually needed
  - Whether low cost is proportionate to its usefulness while retaining the features and functions that add value
Managing cash flow
- Buyers can help an organisation’s cash-flow by increasing the time between receiving goods and then having to pay the suppliers for them.
- This may mean ensuring that the contract includes an extended payment period that is different to those normally expected e.g. parties agree to 60 or 90-day payment terms instead of 30 day terms.
- Additionally, buyers and suppliers may agree a payment plan that is different from standard approaches which ensures that the buying organisation can hold on to their cash for longer and make it work harder for them.
- This type of approach can also help an organisation’s inflow of cash as it may enable them to sell their items on to their customers either through resale (retailers) or as part of finished goods (manufacturers).
- The buyer does, however, need to ensure that this approach is used wisely and with consideration of the impact this is going to have on the supplier. They need to consider whether the change to payment terms would have an unethical effect, e.g. on SME suppliers, or have a detrimental impact on a supplier’s ability to continue to do business.
Use of Information technology to streamline processes eg EDI and other e-procurement tools to:
- Increase productivity and reduce labour costs; secure competitive pricing (eg through internet access to global markets or the use of e-auctions)
- Support more efficient planning and decision making
Despite it often being expensive to implement initially, benefits can be seen in relation to reduced resource costs, labour and time and ensure that required tasks are completed effectively and efficiently.
Procurement’s use of information technology has resulted in the provision of more, real-time information that helps them with forecasting, inventory planning as well as the ability to secure more competitive pricing through e-options such as e-sourcing and e-auctions. Tools such as MRP support inventory reduction as it is a powerful and accurate planning system.
Supplier management is made easier as information technology can aid better decision making with improved supplier performance data. Integrating systems with partnership suppliers reduces costs long term as suppliers can better meet the needs of a buyer.

(ii) Quality

Improved quality adds:

economic value because the organisation can charge premium prices
customer value by enhancing perceived product and service benefits

Quality must be built into the product. It is the buyer’s responsibility to ensure that suppliers have the ability, motivation and adequate information to produce the materials and components of the specified quality, in a cost-effective manner. In fulfilling this responsibility the buyer can exert positive control over the quality and costs of incoming material

Strategic level: Supplier relationship management, Early Supplier involvement, supplier selection and development policies
Operational level: Materials specification, SLA’s, supplier evaluation, quality control, benchmarking, etc

Procurement can add value through quality improvement by:

Selecting suppliers with accredited QMS i.e. API, ISO9000
Appraising the QMS and track record of suppliers as part of supplier appraisal and selection process
Prepare preferred or approved vendor lists that have already been appraised
Develop goods inwards procedures for quality inspection and testing (where necessary in addition to supplier’s quality assurance)

Question 2

Q

1*

Explain THREE benefits of the use of positive relationship management in supply chains – 16/03, 14/05 (15)

Explain: Give reasons for, or account for something, so that it is clear or easy to understand 

Answer

A

p.65

The development of trust (or mutual dependence)
- Encourages:
  - information sharing,
  - joint working,
  - fewer or better resolved disputes and
  - systems of continuous improvement.
- The sharing of information can also achieve joint planning thus creating demand led supply chains that can help avoid the creation of unnecessary inventory or capacity.
Improved business efficiency can be achieved through
- integration of management information and communication systems including
  - work scheduling,
  - better information sharing,
  - joint procurement activity and
  - ordering and billing routines.
- Also efficiency can be used through introduction of initiatives such as waste reduction.
Potential for value-adding synergy
- Goodwill and trust enables both parties to work together creatively on business projects and provides greater potential for
  - synergy,
  - sharing ideas and
  - loyalty in the face of problems and possibly disputes (ie contract disputes, slower demand)
- Preferential treatment may be given over a supplier’s other customers based on the longevity and quality of the relationship (i.e. first call on scarce supplies, fast tracking and flexibility when required)
- There may be opportunities for collaborative promotions (i.e. between a supplier and a retail buyer)

Question 3

Q

1

Describe FIVE sources of added value that can be achieved through supply chain relationships

(25 marks) Jan 2017, Nov 2014, July 2014

Describe Give a full account or a detailed representation of something

ALSO: Analyse FIVE examples of added value that could be achieved for an organisation by having a positive relationship with its suppliers - 18/01, 15/05 (25)

Analyse: Examine a topic together with thoughts and judgments about it, by dividing the topic into its separate parts and looking at each part in detail

Answer

A

p.59

Enhancing economic and customer value relationships with suppliers that can result in enhanced benefits or features to the products or services that in turn enable higher margins to be made
- the ultimate value a company can create will depend on the value it can create for its customers over and above standard functions such as production, logistics, etc
- buyers can add value by gaining improved output at reduced costs ie
  - cutting costs (without sacrificing quality or features)
  - securing operational efficiency (to ensure quality or additional features)
Eliminating waste through collaborative relationships can help both parties work together to reduce costs through a range of measures including eliminating any duplication, reducing wasteful practices e.g. large inventory, unnecessary transportation etc.
- Taichi Ohno from Toyota identified 7 waste areas in a manufacturing environment
  1. Waiting - delays or queues in processing
  2. Over production - leads to product deterioration and obsolesence
  3. Motion -unncessesary human motins ie bending, reaching, causing injury or fatigue
  4. Over processing - use of unnecessarily complex product features or processing requirements
  5. Transportation -unnecessary movement of materials
  6. Inventory - unnecessary stockholding incurring storage and financing costs
  7. Defects/corrections - costs of rework and scrap
Reduced costs as all parts of the supply chain work together to improve price and cost management
- Managing costs is the cornerstone of achieving company objectives ie liquidity, profitability and return on capital employed
- Cost strategies are about knowing what the costs really are and then finding ways to reduce them by:
  - Applying effective price analysis on whole life costing, total cost of ownership or total acquisition costs
  - Look at elimination of waste
  - Negotiating on Price, etc
- Price management involved managing input costs by ensuring optimum price for routine and leverage procurements by performing:
  - Price analysis (to determine if the offered price is fair and appropriate)
  - Cost analysis (looks at how the quoted price relates to the supplier’s cost of production)
  - Price leverage (competitive price is more important than value for money)
Improving quality or reducing defects – relationships with suppliers can help analyse the cause of any defects and across supply chain programmes to reduce defects can be introduced to ensure that in the future purchases will conform to agreed or expected standards
- Buyer must choose suppliers that can meet specifications by being motivated, capable, innovative and able to understand the information on the specification
- Buyer can exert control
  - Strategically - supplier relationship management, supplier selection and development practices, quality management policies, etc
  - Operationally - SLA’s, supplier evaluation, contract management, etc
- Procurement can add value via quality by
  - Selecting suppliers who have a third party accredited QMS ie ISO, API, etc
  - Appraise suppliers’ QMS and track record as part of supplier appraisal and selection process.
- Prepare preferred supplier lists for company to use because they have already been appraised and comply
- Develop good inwards goods practices that inspect quality to ensure they comply to the specification before accepting goods
Reducing inventory requirements of products or availability of services through improved forecasting and planning because of improved communication within the supply chain. This means that supply chain participants are able to match supply with changing demand patterns and ensure an efficient process. This adds value by
- keeping sufficient stock avoids bottlenecking or shutdown production which causes idle time, late delivery and related loss of credibility to customers
- Buyers can take advantage of bulk buying, lower prices and reduced transaction costs by keeping larger inventories
- Note of caution - inventory is also seen as a waste because it can mask inefficiencies in production planning or processes
- Efficient inventory management can be achieved by
  - Accurate demand forecasting
  - Use of Stock replenishment systems ie MRO
  - ‘Pull’ inventory management techniques for dependent demand items ie as and when required by the company. Could include JIT, MRP and ERP
  - Just in Time supply (JIT) - aims to ensure goods arrive at the factory just in time before it goes into production
  - Standardisation and variety reduction

Question 4

Q

1*

Explain, using examples, the following competitive forces in supply chains:

(i) Threat of new entrants to a market

(ii) Power of suppliers

(iii) Power of buyers

(iv) Potential product or service substitutes

(v) Competitive rivalry

25 marks

Mar 2017, Jan 2015, July 2013

Explain how the following competitive forces might impact on supply chain relationships:*
(i) Bargaining power of suppliers in a market* (ii) Threat of new entrants to a market (iii) Potential substitute products (iv) Competitive rivalry 17/7, 15/11

Answer

A

(i) Threat of new entrants to a market (p.44)

This force affects the power between companies that operate in a market based on the ability of others to enter the market by
- expanding supply without increasing demand
- strive to penetrate the market and get market share
- innovation and aggressive competition
- increasing costs by bidding for factors of production
A market may be attractive to new entrants when there are low barriers to entry
- low monetary costs
- quick set up time.
Existing suppliers in the market may find their share decreasing and may need to take steps to ensure that their position is retained.
Example: New airline - threat is low to medium. It is very costly and require special licences, insurances and other qualification that are not easy to obtain. Existing suppliers have experience, buyer confidence and possibly established fleets.

(ii) Power of Suppliers (p.45)

This is a measure of how key suppliers in a market can affect the operation based on the level of power that they have.
The lower the number of suppliers, the more unique the product or service, and a great number of buyers can mean that the suppliers can wield power in the market.
This may mean buyers have no option but to accept the pricing or options provided by the supplier market.
Suppliers are particularly powerful when
- there are few substitutes or the supplier’s product is highly differentiated
- the volume purchased by the buyer is not important to the supplier
- the supplier’s product is an important component in the buyer’s business eg memory chips in cellphones, computers
- switching cost for the buyer is high ie investment in relationship with suppliers or contract penalties for switching - eg cellphone contracts
- potential for forward integration - suppliers can own or control their buyers eg a manufacturer opening retail stores
Example: Diamond mining - very few suppliers and it is regulated by licences, expensive to operate. Many different industries are ‘fed’ by mining of diamonds. Buyers see it as a superior product compared to other precious stones so will pay a premium for it.

(iii) Power of buyers (p.45)

The level of pressure that customers (the buyers) can exert in a market in order to obtain high quality products and services as lower prices determine the power they have over suppliers
Where there are few buyers but many suppliers all potentially providing similar products or services, which the buyer can switch between with ease.
The buyer is able to drive pricing down and suppliers will actively try to foster a longer term relationship or single sourced arrangement with them.
Buyers are particularly powerful when:
- They are limited in numbers and/or large in size - relative to the supplying companies
- Spend is a high proportion of supplier’s revenue - but not a high proportion of their own spend and they are not dependent on the supplier
- Products and services are undifferentiated or there are substitutes available making it easy to switch suppliers
Example: Buyers purchasing stationery - it is inexpensive to purchase and great variety available

(iv) Potential product or service substitutes (p.46)

In a market where there are viable substitutes or alternative choices for a buyer to make whilst still ensuring that their needs are met will impact on the power of either the buyer or supplier. This refers to a situation when alternative products which serve the same purpose are available in a market and it is easier for buyers to switch to other areas. Examples: postal services, courier services, fax machines and email
Where there are many substitutes available, the demand for the product is likely to be relatively price sensitive: buyers will switch to get lower prices if supplier raises prices
Improved price or value positioning is a significant threat to suppliers in a given supply market
Examples: Bread - many different brands and variations to choose from.

(v) Competitive rivalry

Competitive rivalry can lead to either aggressive competition or collusion between buyers and sellers
Competitive rivalry exists as companies differ from one another in terms of their resources, capabilities and core competencies. This means that they compete against each other when opportunities and threats appear and each tries to achieve a competitive advantage over the other.
Rivalry is likely to be high when
- there are a large number of suppliers of equal size in a market with little difference between the product or services yet the ability to enter or exit the market is restricted because of cost.
- Slow rate of industry growth (pie remains the same size so only way to grow is getting a bigger slice)
- Lack of product and service differentiation
- High fixed costs of production
- High barriers to exit - cheaper to compete than withdraw from the industry
Examples: innovative technology i.e. cellphone companies release new versions of their flagship models annually

Question 5

Q

1*

Explain and illustrate with a diagram:

(ii) A risk assessment matrix.

15 Marks

May 2017

Answer

A

p.28

The Risk Assessment Matrix has 4 quadrants
Risk is commonly assessed as a function of:
- Probability/likelihood that an event will occur (at the top of the matrix)
- Consequences/Impact as a result of the event (both negative and positive) (on the left hand side of the matrix
Risk levels can be as a simple formula: probability x consequence where
- Probability is expressed as a % likelihood of a risk occurring
- Impact is expressed as a number from 1 to 10 (1 low adverse risk and 10 disastrous consequence)
The relative risks associated with different procurements, suppliers or supply markets can then be categorised as low,moderate or high - according to their total risk scores or other decision rules (eg a consequence rating of 7 or more qualifies as high risk, regardless of probability)

For example if an analysis on a given supply market is performed, focusing on categorising identified risks to supply:

| LOW | HIGH |

Likelihood occurrence |———————————————-

LOW | A | C |

|———————————————–

HIGH | B | D |

|———————————————–

Segment A:

Risk: a power failure at all supplier’s factories all at once

Probability/Likelihood: Unlikely to happen

Consequence/Impact: Little effect

Action Plan: Due to low impact, organisation can safely ignore such factors as low priority

Segment B:

Risk: Fluctuation in exchange rate if the organisation is not heavily exposed by international sourcing

Probability/Likelihood: Relatively likely to occur

Consequence/Impact: No major effect

Action Plan: Would be appropriate to monitor such factors in case the situation changes and the impact may be greater than expected

Segment C:

Risk: Business failure of a supplier of critical requirements

Probability/Likelihood: Events are unlikely to happen

Consequence/Impact: Will have a big impact if they do

Action Plan: Would be appropriate to draw up a contingency plan to minimise the impact in case the event occurs

Segment D:

Risk: Emergency of new technology that will alter the supply market

Probability/Likelihood: Relatively likely to occur

Consequence/Impact: Serious impact

Action Plan: Would be appropriate to respond to the perceived threat or opportunity including strategic analysis and planning

Impact/effect on organisation |

Question 6

Q

1*

Explain and illustrate with a diagram:

(i) A supplier preferencing matrix.

10 Marks

May 2017

(a) Outline ONE portfolio analysis technique used to assess relationships in the supply chain. (4) March 2018, July 2015

Answer

A

p. 32
* The supplier preferencing Matrix illustrates how attractive it is for a supplier to deal with a buyer and the monetary value of the buyer’s business to the supplier.

Attractiveness* | ————————————————————————
of buying* | LOW | Nuisance | Exploitable |
organisation* | ———————————————————————–

| | LOW | HIGH |

< ———–Value of Buyer’s Business——————->

NUISANCE

Neither attractive or valuable to do business with
Suppliers practising customer relationship management will regularly review their customer base and downgrade or cease service to unprofitable customers - or raise their prices (in such a way to turn them into exploitable customers)

EXPLOITABLE

These customers offer large volumes of business which compensates for lack of attractiveness
The supplier will fulfil the terms of the contract but will not go out of its way to provide extras (any extras demanded will be charged at additional cost)

DEVELOPMENT

These customers are attractive despite currently low levels of business
The supplier may see potential to grow the account and may court extra business by ‘going the extra mile’ in fulfilling contracts: if all goes well, the customer may be converted to core status

CORE CUSTOMERS

Core Customers are highly desirable and valuable for suppliers who will want to establish long-term mutually profitable relationships with them if possible

HIGH | Development | Core |

Question 7

Q

1*

a. Describe FIVE factors that may influence the appropriate type of supplier relationship for a purchasing organisation.

10 Marks

Nov 2017

Explain FIVE factors that might impact on the nature of the relationship between a purchaser and a supplier. Illustrate your answer with examples. (25 marks) May 2018, Nov 2016

Answer

A

The nature and importance of the item being purchased
- low value, routine one off purchases are unlikely to justify heavy investment in long term collaboration compared to complex,
- customised high value purchases in unstable supply markets may well justify such investment in order to secure control over the supply specification, quality and availability
Geographical distance
- Close relationships may be more difficult to establish and maintain with overseas, especially if there is little communication infrastructure
Supply market conditions
- If supply is subject to risk eg due to weather or economic conditions the buyer may wish to multi-source
- If the prices are fluctuating the buyer may want to do opportunistic spot buying - or to lock in better prices through fixed contracts
- If the market is fast changing and innovative it may avoid being locked into long term supply agreements
- If there are few quality, capable high profile suppliers it may wish to enter into a partnership with them
The company’s and purchasing function’s objectives and priorities
- best available price, security and quality of supply, etc

Question 8

Q

1*

b. Explain the following ways in which procurement might contribute to

cost management:

(i) Value-analysis
(ii) Extending payment terms
(iii) Use of information technology

15 Marks

Nov 2017

Answer

A

(i) Value-analysis

Procurement can use value analysis to contribute to cost management by analysing the function of a service, material, part or system to identify areas of unnecessary cost, to identify those that do not add value.
This analysis asks whether the use of the item contributes to the overall value and;
- Whether its cost is proportionate to its usefulness
- Whether all its features are needed
- Whether a lower cost method could be used
Once this has been established procurement can look to remove waste throughout the supply chain but at the same time still ensure that the final product/outcome retains the features and functions that add value in the eyes of their customers.

(ii) Extending payment terms

Buyers can help an organisation’s cash-flow by increasing the time between receiving goods and then having to pay the suppliers for them.
This may mean ensuring that the contract includes an extended payment period that is different to those normally expected e.g. parties agree to 60 or 90-day payment terms instead of 30 day terms.
Additionally, buyers and suppliers may agree a payment plan that is different from standard approaches which ensures that the buying organisation can hold on to their cash for longer and make it work harder for them.
This type of approach can also help an organisation’s inflow of cash as it may enable them to sell their items on to their customers either through resale (retailers) or as part of finished goods (manufacturers).
The buyer does, however, need to ensure that this approach is used wisely and with consideration of the impact this is going to have on the supplier.
They need to consider whether the change to payment terms would have an unethical effect, e.g. on SME suppliers, or have a detrimental impact on a supplier’s ability to continue to do business.

(iii) Use of information technology

The use of information technology can help cost management as systems are able to streamline processes and increase productivity.
Despite it often being expensive to implement initially, benefits can be seen in relation to reduced resource costs, labour and time and ensure that required tasks are completed effectively and efficiently.
Procurement’s use of information technology has resulted in the provision of more, real-time information that helps them with forecasting, inventory planning as well as the ability to secure more competitive pricing through e-options such as e-sourcing and e-auctions. Tools such as MRP support inventory reduction as it is a powerful and accurate planning system.
Supplier management is made easier as information technology can aid better decision making with improved supplier performance data. Integrating systems with partnership suppliers reduces costs long term as suppliers can better meet the needs of a buyer.

Question 9

Q

2*

(a) Explain the following types of dispute resolution:

(i) Mediation

(ii) Arbitration

(iii) Adjudication.

15 Marks

May 2016

Answer

A

(i) Mediation (p.120)

Mediation is an alternative dispute resolution (ADR) option
Mediation follows conciliation if a voluntary settlement is not reached (concilliation is also an option of ADR - process where conflicts and grievances are aired in a discussion)
An independent person (or panel) is appointed who wil consider both sides and make a formal proposal or recommendation (not binding to either party) as a basis for settlement of the dispute.
It is possible to distinguish between:
- Facilitative mediation - mediator assist te parties’ own effrosts to forumlate a settlement
- Evaluative mediation - the mediator additionally helps the parties by introducing a third party to view over the merits of the case or particular issues between the parties
This is most common for of ADR in commercial disputes

(ii) Arbitration (p. 118)

This is an adversarial approach and tend to result in a ‘win-lose’ solution
It involves the appointment of a mutually acceptable independent person (or panel) who will consider the arguments of both sides, in formal, closed proceedings and deliver a decision or judgement which is legally binding on both parties
Due to disadvantages of litigation its common to go to arbitration first, which is usually stipulated in a contract as an arbitration clause.
It is usual for the arbitration agreement to contain time limits during the which the arbitration must begin in the event of a dispute
Both parties must agree to be bound by the decision of the arbitration which can be enforced as if it is a decision of the court
The arbitrator is obliged to give reasons for the award he eventually declares. It is regarded a basic rule of justice that someone charged with making a binding decision affecting the rights of others, should normally be required to justify the decision.

(iii) Adjudication (p.120)

This is an adversarial approach and tend to result in a ‘win-lose’ solution
It is a process whereby an expert third party appointed by the agreement between the parties in a dispute, hears arguments and makes a decision. Compared to arbitration, it
- Is less formal (and potentially less costly and time consuming)
- Focuses on the facts of the dispute rather than points of law
- Is less clearly binding, free from intervention by the courts (unless the contract provides for the expert determination to be final and binding)
- May be likened to ‘negotiation with a referee present’
- The term ‘adjudication’ is used almost exclusively for dispute resolution under the Housing Grants, Construction and Regeneration Act (HGCRA). Construction contracts must include a provision for adjudication, with the adjudicator giving decision within 28 days of referral. The adjudicator’s decision is binding until a final determination is reached by agreement, arbitration or litigation - or the parties may take the adjudicator’s decision as final.

Question 10

Q

2*

(b) Outline the meaning of the term ‘litigation’ and explain FOUR potential disadvantages of litigation as a method of resolving contract disputes.

10 Marks

May 2016

ALSO:

b. Discuss FIVE disadvantages of using litigation as a means of resolving disputes.

15 Marks July 2016, Jan 2015, Nov 2013

Answer

A

p.117

Litigation is legal action to have a commercial or contract dispute resolved in court
Litigation includes any number of activities before, during, and after a lawsuit to enforce a legal right. In addition to the actual lawsuit, pre-suit negotiations, arbitrations, facilitations and appeals may also be part of the litigation process.
Litigation begins the moment someone decides to formally enforce or defend his or her legal rights
Litigation should be the last resort particularly with important suppliers, even if it wins the case, the buyer will have lost a valuable source of supply
Disadvantages of litigation are:
- Costly legal fees (although the winning party may have its costs reimburses by the court)
- The matter may not come to court for a long time and could take a long time to be resolved because of the nature of the system. This could be unacceptable If you depend on the outcome i.e. if you need action such as payment from the other party. It could potentially disrupt business activities.
- The details of the conflict will be aired in public, possibly revealing confidential or reputation damaging information
- It is particularly complex in the case of international contracts, since the parties may operate in different legal jurisdictions, with different legal systems
- The adversarial approach to resolving disputes almost certainly damages goodwill between the parties and may be a barrier to an ongoing working relationship between them

Question 11

Q

2*

a. Explain the purpose of a liquidated damages clause in a contract.

10 Marks

July 2016, Jan 2015, Nov 2013

Answer

A

p. 106

It is a genuine attempt to
- assess potential loss made either before or at the time of the contract arising from a supplier’s late or unsatisfactory completion of a contract
- to motivate the supplier to complete the contract
The clause specifies the damages which will be payable for breach, at a predetermined amount (eg $x per day late) which is designed to be a genuine estimate of the damage or loss which would be caused by the non-performance of the contract.
The sum referred to in the clause will be paid irrespective of actual losses and will be valid and enforceable by either party - regardless of the actual damages suffered as a result of the breach
It does not matter what the parties’ have called the clause, it’s the reality that counts.
It is necessary to have a cap on liability for LD clauses for it to be successful and will be supported by case law like Dunlop V New Garage, Cellulose V Widnes Foundry or similar.
Such clauses are often used in large contracts eg for construction works or capital equipment

Question 12

Q

2*

(a) Discuss the purpose of the following contract terms:

(i) Applicable law

(ii) Force Majeure

(10 marks)

Nov 2016, Jul 2015

Answer

A

i) Applicable law (p.93)

It is essential to know the applicable law governing an international contract and which country’s courts have jurisdiction in any subsequent dispute.
This term is used extensively when the contracting parties reside in different countries.
Its purpose is to provide clarity on which countries’ laws govern the contract.
If the applicable law is not expressed in the contract and questions or disputes arise, it may be inferred from the nature of the contract and the prevailing circumstances. The general rule is that the choice of law should be the law with which the contract is most closely associated: generally, the law of the country in which the contractual work is to be performed.
This is important
- for the performance of the contract
- in the event of a dispute
The jurisdictional issues are often referred to in an applicable law term as this defines where any dispute will be heard, which may or may not be the same country that provides the applicable law.

ii) Force Majeure (p.91)

The purpose of a force majeure clause is to protect contracting parties from liability when there is a failure to perform the contract, usually due to unforseeable circumstances beyond anyone’s control such as acts of God including, floods, earthquakes, wars, strikes, technical failures
The aim of a Force Majeure clause is to help to reduce the number of disputes due to breach of contract. There could be some restrictions to the use of this clause through national law restrictions.
A force majeure clause should:
- State the events that will constitute force majeure as relevant to the industry or market
- Oblige either party to notify the other if force majeure events have occurred which may materially affect the performance of the contract.
- Provide to either bring the contract to an end or suspend the contract until it can be performed e.g. airlines usually suspend rather than cancel a contract.
- Provide for the termination of the contract, by mutual consent, if the force majeure event continues to prevent performance for more than 30 days (with provisions for transfer of work done so far in return for reasonable payment)

Question 13

Q

2*

(b) Explain each of the following terms highlighting the differences between them:

(i) Conditions

(ii) Warranties

(iii) Innominate terms

(15 marks)

Nov 2016, Jul 2015

Answer

A

(i) Conditions (p.100)

A vital term of the contract, breaching this term may be treated by the innocent party as a substantial failure to perform a basic element of the agreement and has the right to terminate the contract
e.g. “Time is of the essence” as a condition

(ii) Warranties (p. 100)

Less important or non-vital term which is incidental to the main purpose of the contract. Breach of the warranty does not constitute a substantial failure of performance and the injured party may claim damages but cannot terminate the contract
e.g. “Payment terms” as a warranty.

Case law examples (Poussard vs Spiers and Bettini vs Gye)

(iii) Innominate terms (p. 101)

If a term is not identified as a condition or a warranty at the time the contract is made, it is innominate.
The court will consider the effect of a breach of that term and if the consequences of breach are serious, remedies may be granted as if it were a breach of condition.
If the consequences are less serious, then the innocent party can only obtain remedies for breach of warranty
When a party is in breach of a condition, the innocent party has a choice of treating the contract as repudiated (or ended) and claiming damages for any loss suffered - as an alternative to merely claiming damages for the breach.
In the case of a warranty the whole contract doesn’t have to collapse, the innocent party may therefore claim damages for the breach, but cannot repudiate the contract.

Question 14

Q

*2*

(a) Describe THREE benefits and TWO disadvantages of using a model form contract

(10 Marks)

Jan 2017

Answer

A

p. 83

Benefits of model form contracts:

Reduced time and costs agreeing a contract when compared to a negotiated contract
Avoids “reinventing the wheel” - terms have been developed based on past experience in the industry
Wide acceptance of the terms in the industry, reducing negotiation time and costs

Disadvantages:

Terms may not be as advantageous as those that could be achieved by a buyer in a powerful bargaining position
Specific clauses that apply to a contract may not be sufficiently covered

Question 15

Q

2*

(b) Explain the purpose of the following examples of the express terms:

i. Time is of the essence

ii. Retention of title

iii. Force majeure

(15 Marks)

Jan 2017

Answer

A

(i.) Time is of the essence (p. 188)
This expression ensures that a breach of a time stipulated in the contract, usually a delivery date, will be deemed to be a breach of a condition rather than a warranty giving the buyer the right to terminate the contract and sue for damages.

Example:wedding cake being needed for the wedding day or goods for a production line

(ii) Retention of Title (also called a Romalpa clause in some jurisdictions) (p.90)
The purpose of this clause is to provide when ownership (and usually risk) will be transferred from the seller to the buyer. It can include a stipulation that ownership will pass when goods have been paid for in full which provides some protection to the seller and goods can be repossessed if it payment is not made.
In international contexts it could impact on who is responsible for insurance or transportation costs.

(iii) Force Majeure (p.91)

The purpose of a force majeure clause is to protect contracting parties from liability when there is a failure to perform the contract, usually due to unforseeable circumstances beyond anyone’s control such as acts of God including, floods, earthquakes, wars, strikes, technical failures

The aim of a Force Majeure clause was to help to reduce the number of disputes due to breach of contract. There could be some restrictions to the use of this clause through national law restrictions.

A force majeure clause should:

State the events that will constitute force majeure as relevant to the industry or market
Oblige either party to notify the other if force majeure events have occurred which may materially affect the performance of the contract.
Provide to either bring the contract to ;an end or suspend the contract until it can be performed e.g. airlines usually suspend rather than cancel a contract.
Provide for the termination of the contract, by mutual consent, if the force majeure event continues to prevent performance for more than 30 days (with provisions for transfer of work done so far in return for reasonable payment)

Question 16

Q

*2*

Explain FIVE essential elements of a legally binding agreement.

25 Marks

Nov 2017, Nov 2015

Answer

A

Offer – clear and definite proposal capable of being accepted
- An invitation to treat is not an offer.
- Common examples of invitations to treat include advertisements, catalogues, shop displays and web sites.
- An offer terminates through acceptance, rejection, counter-offer as well as lapse of time, death or revocation.
- Case example: Fisher V Bell
Acceptance - unconditional and communicated to the offeror
- Any alteration to the terms of the offer means acceptance has not taken place – it is a counter offer which then has to be accepted by the other party
- Silence is usually not acceptance.
- Case example: Felthouse v Bindley
- Under the posting rule, acceptance takes effect when a letter is posted (that is, dropped in a post box or handed to a postal worker). The “meeting of the minds” necessary to contract formation occurs at the exact moment word of acceptance is sent via post by the person accepting it, rather than when that acceptance is received by the person who offered the contract.
Consideration - something of value is given in exchange by each party which does not need to be monetary (but often is)
- 2 types of consideration:
  - Executed - a contract in which the promises are made and completed immediately, like in the purchase of a product or service.
  - Executory - means that the promises of the contract are not fully performed immediately. An example of an executory contract would be an apartment lease.
- Case examples: McCardle, Stilk V Myrick
Intent - each party must intend to be legally bound by the agreement in order to turn it into a contract
- The law divides agreements into two types:
  - social agreements which the courts presumes are not intended to be legally binding and
  - business agreements which the court presumes are legally binding
- Case examples: Simpkins V Pays
Capacity – each party must have the legal capacity to enter into a contract, typically this means they must be considered an adult (over 18 in the UK), not under any influence (drugs/alcohol) and be of sound mind
- certain groups have special rules that apply to them for example young persons (previously minors) may still be able to contract for necessaries or beneficial contracts of employment

Question 17

Q

3*

a. List FIVE examples of data that might indicate whether or not a contract is being performed correctly.

5 Marks

March 2016

Answer

A

On-time delivery measurements
Number of defects measured as a percentage of the volume of components supplied
Delivery made to the correct location
Quantity delivered in accordance with order requirements
The accuracy of delivery documentation
Price performance - as contract or as compared to external indices
Invoices correctly reflecting contract terms
Number of invoices paid on time
Response time to queries

Question 18

Q

3*

b. Explain TWO advantages and TWO disadvantages of contract management

20 Marks

March 2016

Answer

A

p.149

Disadvantages

The supplier may be obliged to take control of contract performance and problem-solving, resulting in unbalanced decisions that do not serve the buyer’s interests
Decisions may not be taken at the right time (or at all) to protect or optimise performance

Advantages

Improved risk management in developing and managing contracts (particularly in dynamic supply environments where minimal inventory is held, putting pressure on reliable, risk managed supplier performance)
Improved compliance and commitment by the supplier

5 marks were available for each of the advantages and disadvantages discussed with 1 mark being given for correct identification of each advantage and the remaining marks awarded for the depth of explanation.

Question 19

Q

3*

Explain the following FIVE responsibilities for the contract manager of a large, long-term contract.

I. Ordering and payment responsibilities (p.161)

II. Risk assessment and risk management (p.157)

III. Contract development (p.156)

IV. Contract maintenance, updating and change control (p.160)

V. Contract termination. (p.162)

25 Marks

July 2016, Nov 2013

ALSO: Explain FIVE of the responsibilities of a contract manager. 25 Marks Jan 2018, Jul 2015

Answer

A

i. Ordering and payment responsibilities;

The contract manager would be responsible for ensuring that suppliers are given full lead-time and that all purchase orders are placed correctly meeting the requirements of the 5 ‘rights’ of purchasing, right price, right place right quality, right quantity and right time.
Payment for goods/service is a basic contract obligation and the supplier has legal remedies as a result of non-payment
Contract manager should ensure the relevant budget holder authorises and actions payment on agreed terms and schedules
Basic processes are
- Supplier submits invoice for goods/services provided
- Buyer checks that it corresponds to the order and specifications ie right price, payment terms
- Buyer queries discrepancies with the supplier or authorises the invoice for payment and pass it to accounts for payment
- Invoices should be paid within the period stated in the agreed terms of the contract

ii. Risk assessment and risk management;

A contract manager would need to collaborate with users and suppliers to identify potential risks or barriers to performance, so that they can be managed or mitigated.
The contract manager would need to identify any ‘early warnings’ that the supplier is showing possible financial difficulties.
Create risk management strategies
Develop and maintain risk registers relevant to a given contract
Monitor contract performance and environmental risk factors through the life of the contract

iii. Contract development;

A contract manager would be involved in the negotiation, formulation and agreed contract terms and associated document ie:

Product specification
Service level agreements
Pricing and delivery schedules
Documentation requirements ie H &S records, quality and other standards certifications
Supplier incentives and performance measures (KPI’s) for performance management
The contract manager also manages the post contract award activity, that would be carried out to understand, identify and develop further to ensure mutual benefit is obtained.

iv. Contract maintenance, updating and change control;

A wide range of responsibilities including administration of the main contract document itself as well as making sure that all of its sub-sections are correctly implemented.
Ensuring that any changes to the documentation are important as it is essential that the current versions of all documents are being used.
All changes to the contract must be agreed, authorised, accurately documented and implemented by both parties, and ensuring that all versions and related documents (such as budgets, SLAs, KPIs) are consistent.
If something goes wrong then having the correct documents is crucial as it provides a clear audit trail of responsibilities.

v. Contract termination;

There may be many reasons why a contract can be terminated including breach, mutual agreement and satisfactory delivery.
The contract manager would need to manage the termination based on the reason why it is terminated e.g.
- If the current supplier’s performance has been unsatisfactory, the contract may be terminated and the urgency to find a new supplier may be more pressing than a situation where the termination is planned for and relationships need to be maintained for future business.

Question 20

Q

3*

Explain the responsibilities of a contract manager in relation to:

i. Performance management (9 marks)

ii. Relationships management (8 marks)

iii. Contract document management and change control (8 marks)

(25 Marks)

Jan 2017, Jan 2015, March 2014

Answer

A

i. Performance management

Performance Management is a key aspect of the responsibilities of a contracts manager.
The task of performance management starts during negotiation and development of the contract. The performance measurements (KPI’s) should be clear and concise and jointly agreed by both parties.
The measurement process will often include setting of targets and also the ongoing review against these to ensure continual delivery. The management of KPIs and SLAs by the contract manager will help ensure a successful outcome for the contract.
In well developed supplier relationships the supplier will be involved in regular performance reviews (performance, compliance to quality standards and service levels) and ongoing discussions related to targeted areas for future improvement. It also helps ensure that contract outputs and outcomes are delivered and that threats and problems are dealt with as they arise.
This is a repeating cycle, enabling buyers to provide regular feedback for performance adjustment, improvement target-setting and decisions about contract renewal.

ii. A key aspect of the contract manager’s role is management of the relationship. The contract manager will have a direct impact on the performance of a contract based on the relationships they form. There are a wide range of relationship types and approaches to managing them ranging from arm’s length transactional types to the closer collaborative relationships and the contract manager will need to choose the appropriate one for the contract.

The approach will depend on the type of contract ie

non-strategic contracts - arm’s length
long term strategic contracts - emphasis on building solid relationship

Additionally the contract manager has the unique position of having relationships both upstream and downstream in the supply chain.

Procedures for handling conflict should be agreed, clear reporting and escalation procedures should be in place. The objective is a co-operative relationship between buyer and supplier to ensure problems are recognised and dealt with efficiently

The contract must define corrective action measures and the response to the failure should be commensurate with the failure. In more serious cases the contract should specify the circumstance under which a contract may be terminated

iii. Contract document management and change control

A wide range of responsibilities including administration of the main contract document itself as well as making sure that all of its sub-sections are correctly implemented.
Ensuring that any changes to the documentation are important as it is essential that the current versions of all documents are being used.
All changes to the contract must be agreed, authorised, accurately documented and implemented by both parties, and ensuring that all versions and related documents (such as budgets, SLAs, KPIs) are consistent.
If something goes wrong then having the correct documents is crucial as it provides a clear audit trail of responsibilities.

Question 21

Q

*3*

(a) Explain an approach that might be used by a procurement organisation to assess contractual risk.

A diagram or matrix may be used to support your answer.

10 marks

July 2017, May 2015

Answer

A

p.140

Identify sources of risk
1. Identify potential problems or areas of uncertainty ie “What can go wrong?”
2. This can be done using processes ie
  1. Environmental Scanning, Steeple analysis, SWOT analysis
  2. Formal risk analysis exercises
  3. Monitoring risk events
  4. Critical incident investigations
Assess probability and impact of potential risks
1. “How likely is it and how bad could it be?”
2. Formulate risk management strategies
  1. It allows the company to prioritise planning and resources for contract management to meet the most severe risks, and to set defined risk thresholds at which contract management action will be triggered
  2. Risk Management strategies are identified as
    1. Tolerate (or accept) the risk
      - If assessed likelihood is negligible
    2. Transfer or spread the risk
      - Take out insurance cover
      - Don’t put all eggs in one basket (ie dual or multisource)
      - Use contract terms to ensure the costs of the risks will be borne by supply partners
    3. Terminate or avoid the risk
      - If the risk is too great and cannot be reduced then it might be best not to take the risk at all or renegotiate to avoid the risk
    4. Treat or mitigate the risk
      - Take active steps to manage the risks in such a way to reduce/minimise its likelihood/impact
      - Might involve measures such as supplier monitoring, performance management, code of conduct, etc
Allocate accountabilities and resources for managing identified risks
1. Who will take lead responsibility for managing the risk
2. Implement risk management
  1. The risks can then be entered into a Risk Management Register which would log:
    1. Description of the type and nature of the business
    2. Probability of the risk event occurring (expressed as a rating)
    3. Impact, cost or consequence if the risk event occurs (expressed as rating)
    4. Identified possible responses (mitigation or contract management) actions
    5. The risk owner: person/position who is accountable for its management
    6. Regular update on status of the risk
Monitor, report, adjust
1. “What happened and what can we learn?”
2. Ascertain if the risk profile has changed and identify newly emerging or escalating contractual or relationship-related risks
3. Give assurance that the company’s risk management processes are effective by demonstrating avoidance or mitigation of risks
4. Indicate where processes need improvement or where lessons can be learned from critical incidents and contract problems

*Candidates could choose from a number of different approaches to assess risk, Kraljic, STEEPLE and SWOT or a risk assessment matrix to assess contractual risk, such as the well-known ‘likelihood’ vs. ‘consequences/impact’ matrix, or similar, being most commonly used. In order to then achieve the full 10 marks they were required to explain how the
approach that they selected would be used in risk assessment, with or without use of a diagram to help illustrate their points. The emphasis need to be on contractual risk rather than on generic risks.

The question asked for an ‘approach’ to assessing contractual risk, and as such a narrative was required which provided a start, middle and end to the process. Typically Candidates who received a pass or higher mark for this question used the following approach to structure their answer;*

How to identify risks inherent in the contract (these could relate for example to; delivery time, quality, intellectual property.*
How risks would be categorised. This recognised that risks may have different consequences and different probaility of occuring and they needed to explain how their chosen approach would distinguish which contractual risks are likely to have the worst consequences for the procurement organisation and are most likely to occur*
How risks would then be recorded, often providing details or an illustration of a risk register.*

Question 22

Q

3*

(b) Outline THREE resources that could contribute to effective contract management.

15 marks

July 2017, May 2015

Describe THREE resources that are required for effective contract management. (25) Jan 2019, Nov, 2016, May 2014

Answer

A

p.155

the right numbers of people involved in the contract management process to manage the key elements of the contract including performance, data management, finance etc.
- The size of the team may change over the life of the contract because earlier stages are more demanding on time
the right range and balance of skills for the people available, available at contract management activities such as negotiating, and chairing contract management meetings
the right knowledge of the subject matter of the contract, and of the people and personalities involved on both the contractor’s side and within the buyer’s own organisation
enough time resource to do a thorough job of contract management
enough financial resources to allow for effective research (such as D&B reports), and for travel to appropriate meetings and sites, where needed and the ability and finance to host and entertain if appropriate and ethical
Access to sufficiently skilled expertise resources where needed, such as Legal experts, Technical experts, Financial analysts, etc.
The availability of equipment to carry out the contract. These may include IT systems to manage contract information and data, IT hardware etc.
Data is a key resource in the contract which the contract manager will have to collect, manages, and control
The contract may require specialist equipment resources to enable it to be carried out
The contract will require a wide range of resources in terms of materials and goods.
The key aspect of the contract manager’s role is the management of these resources

Question 23

Q

3*

a. Explain the role of ‘information assurance’ (IA) in managing contractual risk.

10 Marks

Nov 2017, Nov 2014

Answer

A

p. 138

It is the practice of managing risks related to the use, processing, storage and transmission of information of data and the systems and processes used for these purposes.
It is related to the field of information security (a branch of computer science aimed at the protection of information systems and their contents, mainly by applying security controls and defences against malicious attacks)
It does however embrace a wide range of issues:
- Corporate Governance: compliance with regulatory standards, internal controls and auditing in regard to data protection, IT systems and fraud prevention
- Contingency, business continuity and disaster recovery planning in relation to key systems risks (data loss, security breaches, systems breakdown)
- Strategic development and management of IT systems to fulfil the current and future needs of the organisation (and supply chain) while minimising risk, through areas such as systems integration, compatibility, flexibility and security

Question 24

Q

3*

b. Describe THREE tasks that might be undertaken by a contract manager as part of their contract administration duties

15 Marks

Nov 2017, Nov 2014

Answer

A

p.159

Expediting
- Expediting means to assist the progress of something
- If the buyer has any concerns about delivery (because the supplier is less than reliable on because on time delivery is critical) orders made under the contract may require expediting
- Expediting should ideally be a proactive role rather than a reactive firefighting role as part of contract management: taking planned steps to ensure that suppliers are able ad on schedule to deliver as agreed in the supply contract
- Not all orders will be worth the effort and expense of expediting so it is important to prioritise deliveries and identify
  - orders of higher risk of delivery problems ( reasons could be that supplier is unknown to the buyer or has a poor/variable track record)
  - the potential consequences of delivery problems that are more severe (reasons could be that the material is critical to production processes or the organisation has low safety stocks)
- Expediting tasks could consist of:
  - Ensuring that delivery deadlines and specifications are clearly set out and if any changes are made, they are clearly communicated and agreed
  - Maintaining project and production schedules and time-phased material requirements (e.g. in an ERP system). A project expeditor may maintain critical path network charts and/or Gantt charts showing the optimum and latest times at which supplies are required for each stage of the project. For regular supplies a simple diary system may be sufficient to flag which orders need to be expedited on a given day or week.
  - Monitoring or enquiring about supplier progress at key stages (without micro managing) or developing a system of reporting by exception where the supplier notifies the expeditor of any stage deadlines missed or potential problems identified
  - Working with suppliers to solve any identified problems. The expeditor may have to
    - persuade a supplier to give priority to the order or buying organisation
    - offer help with production difficulties
    - offer help in souring any materials or information which may be holding the supplier up
  - Requiring notification of dispatch of goods and using track and trace facilities where available to monitor their progress in transit
  - Placing pressure on delinquent suppliers where required reminding them of late delivery penalties (e.g. liquidated damages clauses) or involving senior managers in problem-solving or enforcement discussions
  - And when necessary use contingency plans to search for alternative suppliers, existing stocks or substitute goods to meet an emergency shortage due to delivery delay
- Payment Responsibilities
  - Payment of the supplier on agreed terms in return for goods or services is a basic contract obligation for the buying organisation and the supplier has legal remedies for breach of contract by the buyer in the event of non-payment or late payment
  - It is the responsibility of the contract manager to ensure the relevant budget holder authorises and actions payment on agreed terms and schedules
  - Generally the supplier will send an invoice and the buyer should check that it corresponds with the order/contract (in regard to agreed price, instalment schedule and payment terms) and the goods are delivered as contracted and then either
    - queries the discrepancies or
    - authorises the payment of the invoice
  - Invoices should be paid within the period stated in the agreed terms of trade. Credit periods can affect cash flow both the buyer and supplier
  - It is part of ethical trading to pay the invoice on time as agreed and it affect the buyer’s standing as an attractive (or unattractive) customer for suppliers and the ongoing relationship with the supplier
  - Commercial payments are often made by electronic credit transfer though the banking system which is safe and swift
Post-contract lessons management
- The contract management team should intentionally review the contract’s history and outcomes and gather feedback from a range of stakeholders on
  - what went right and what went wrong in the performance and management of the contract
  - how things could have been done more effectively or efficiently
  - what new knowledge or lessons have emerged from the contract and should be carried forward to future contracts and contracting processes

Question 25

Q

*4*

a. Explain the term ‘supplier development’.

5 Marks

March 2016

Answer

A

p.210

May be defined as an activity the buyer undertakes to improve a supplier’s performance/capabilities to meet the buyer’s short-term or long-term supply needs
Hartley and Choi identify two overall objectives:
- Raising supplier competence to a specified level (eg in terms of reduced costs, improved quality or delivery performance).
  - Results oriented development programmes focus on solving specific performance issues - the buyer supports the supplier in making step-by-step technical changes to achieve pre-determined improvements.
- Supporting suppliers in self sustaining required performance standards through a process of continuous improvement.
  - Process oriented development programmes focus on increasing the supplier’s ability to make their own process and performance improvements, without ongoing direct intervention from the buyer. The buyer supports the supplier in learning and using problem solving and change management techniques
  - The process of kaizen or continuous improvement is an important aspect

Stronger responses detailed the objectives of supplier development, including raising supplier competence to specified level (this is results orientated) and supporting suppliers in sustaining required performance levels (this is process orientated)

Question 26

Q

4*

b. Examine TWO supplier development approaches that could be used to correct perceived gaps in a supplier’s performance.

10 Marks

March 2016

Answer

A

p.210

Directive approach

Suppliers are directed, regulated via specification of targets, goals, etc. In some senses this can be viewed as ‘telling’ or ‘command and control’ approach.

Facilitative approach

Buyers and suppliers engage collaboratively in learning, teamwork and improvement planning, to achieve continuous improvement, best-practice sharing, collaborative learning and a ‘win win’ orientation

Both strategies can be used by purchasing as components of the supplier development toolkit. In the beginning stages of the supplier development programme the directive method will be more appropriate because it is structures and will ensure understanding and alignment of development goals. Later on as the development programme matures and trust is built, it could move towards a facilitative approach.

A wide variety of appoaches can be used to bridge the perceived gaps:

Secondment of purchaser’ staff to the supplier (or vice versa) to help train or correct errors, coaching, consultancy, support or liaison
Offering training for the supplier’s staff in relevant areas (technical aspects of the requirement or benchmarked best practice)

Question 27

Q

4*

c. Examine ONE cost of supplier development from the following perspectives:

The buyer’s perspective (5 marks)
The supplier’s perspective (5 marks)

10 Marks

March 2016

Answer

A

p.213

Costs of ongoing relationship management (where required) - the benefit

Buyer’s perspective:

Streamlining systems and processes: reduced waste, process efficiencies, cost reduction

Supplier’s perspective:

Improved capacity and service levels, leading to additional sales to other customers

Time cost
Human resource cost
Financial costs and expenses in carrying out development activities
Opportunity cost

Question 28

Q

4*

(a) Explain the concept and principles of Total Quality Management (TQM).

(16 marks)

Nov 2016

Answer

A

p. 204

TQM is an orientation to quality in which quality values and aspirations are applied to the management of all resources and relationships within the firm and through the supply chain in order to seek continuous improvement and excellence in all aspects of performance
From the buyer’s point of view the provision of ‘the right’ quality inputs is only one part of a total quality picture which also
- embraces supply chains
- continuous collaborative improvement;
- cross-functional co-operation on quality
Key principles of TQM are:
- Get it right the first time
  - Quality should be designed into products, services and processes aiming for zero defects. Defects cost money and shouldn’t be tolerated
- Quality Chains
  - The chain extends from suppliers through to consumers via the internal chain. The work of each link impacts the next one and will affect the quality of the output
- Quality Culture
  - Quality is a way of life - a key cultural value in the organisation that must be expressed and modelled by senior management and supported and reinforced by recruitment, training, appraisal and reward systems
- Total Involvement
  - Every person in the company has an impact on quality and it is everyone’s responsibility to get it right
- Quality through People
  - Commitment, communication, awareness and problem-solving are more important than mere systems
- Team-based management
  - Teams must be empowered and equipped to take action necessary to correct the problems, propose and implement improvements and respond flexibly and fast to customer needs
- Process alignment
  - Business processes must deliberately designed and modified so that every activity is geared to the same end: meeting the customer’s wants and needs. Where this is not the case there may be a need for radical change programmes such as business process re-engineering (BPR)
- Quality Management Systems
  - Attention is focused on getting processes right. Quality systems should be thoroughly documented in company quality manuals, departmental procedure manuals and detailed work instructions and specifications
- Continuous improvement
  - Quality improvement is not a one off exercise. It should be improved continuously and companies should stay open to new opportunities and approaches and encourage learning and flexibility at all levels
- Sharing best practice
  - Quality circles, networks or matrix structures, benchmarking, accreditation and certification schemes and supply chain networking are used to share data, techniques and standards

Question 29

Q

4*

(b) Suggest possible reasons why all companies do not adopt Total Quality Management.

(9 marks)

Nov 2016

Answer

A

p.205

TQM can prove limited in practice
- The initiative may be poorly introduced or managed, and therefor ineffective. Short term benefits of introducing TQM may wear off over time as people get complacent or bored
TQM can be disruptive
- If it is introduced with a ‘blitz;’ approach - leaving people unsure about what to do or what to do next
- The extent and trauma of the change required should not be underestimated
TQM is time consuming, costly and difficult to introduce, implement and settle in
- Particularly in large bureaucratic organisations which may resist new cultural values such as customer focus and employee involvement

Question 30

Q

4.*

Supplier relationship management includes the measurement of supplier performance.

Explain how supplier performance might be measured and assessed as the basis for improvement.

(25 Marks)

Jan 2017

(a) Explain TWO ways of measuring supplier performance. (10 Marks) March 2018, Jan 2016

Answer

A

p.192

Supplier performance measurement is the comparison of a supplier’s current performance against:

Defined performance criteria to establish whether the aimed for or agreed level of performance has been achieved. Approaches:
- Key Performance Indicators (KPI’s)
  - KPI’s are clear quantitative or qualitative objectives which define adequate performance in key areas (or critical success factors and against which progress and performance can be measured
  - Examples of KPIs might be:
    - proportion of requests and proposals responded to and how quickly
    - Delivery lead times met or exceeded
    - Quality of goods delivered
  - KPI’s must be relevant, clear and unambiguous and capable of direct, consistent measurement at operational level
- Service Level Agreements (SLA)
  - SLA’s are formal statements of performance requirements, specifying the nature and level of service to be provided by a service supplier.
  - The purpose of a service level specification and agreement is to define the customer’s service level needs and secure the commitment of hte supplier to meeting those needs: this can use used as a yardstick against which to measure the supplier’s subsequent performance, conformance (meeting standards) and compliance (fulfilling agreed terms)
Previous performance to identify deterioration or improvement trends and there are various approaches:
- Continuous monitoring
- Periodic reviews
- Post-completion reviews with the purpose of exchanging feedback and learning any lessons for the future
The performance of other organisations (suppliers, purchasing functions) or standard benchmarks to identify areas where performance falls short of best practice or the practice of competitors and where there is therefore room for improvement . The aim is to learn both where the performance needs to be improved and how it can be improved by comparison with excellent practitioners
The use of Vendor Rating (VR) as a systematic post contract performance managing and review system
The use of Balance Scorecards - developed by Kaplan and Norton – to measure and maintain a “balance” between a range of different performance measures.
- Kaplan and Norton proposed four key perspectives/measures to be included in a score card
  - Financial - financial performance and creation of value for shareholders
  - Customers - how effectively the company creates value for customers and develops mutually beneficial relationships with customers and shareholders
  - Internal business processes - how effectively and efficiently value adding processes are carried out throughout the supply chain
  - Innovation and learning - skills and knowledge needed to develop distinctive competencies for future competitive advantage and growth

Question 31

Q

4*

(a) Outlive FIVE benefits of an effective service level agreement (SLA) between a buyer and a supplier

10 marks

March 2017, Jan 2014

Answer

A

p.208

The clear identification of customers and providers in relation to specific services
The focusing of attention on what services actually involve and achieve
Fostering of better understanding and trust between providers and customers
Support for the ongoing and periodic review of services and service levels
Support for problem solving and improvement planning, by facilitating customers in reporting failure to meet service levels

Question 32

Q

4*

(b) Discuss THREE methods of monitoring the service level agreements achieved in the performance of a contract

15 marks

March 2017, Jan 2014

Answer

A

p.209

Observation and experience
- Seeing and experiencing the service
  - It may be obvious for example that an office has (or has not) been cleaned to a promised standard, or that a commitment to deliver goods on time has (or has not) been met. Customers may log or report service failure as and when they occur
Spot checks and sample testing:
- performance may be periodically tested and measured in some way
  - for example with a cleaning service, a spot check would involve an unannounced inspection of the offices with a checklist of measures (bins emptied, windows clear, toilets disinfected, etc) while sampling testing might involved analysing the number of dust particles present in selected areas of the carpet
Business results and indirect indicators:
- Services have a purpose - so good or poor quality service has a knock on effect on customers’ activities.
  - For example feedback from the customer’s customers might indicate dissatisfaction with cleanliness of the premises, late transport deliveries, or lack of courtesy by call centre staff

Question 33

Q

4*

(a) Explain FIVE KPIs (Key Performance Indicators) that can be applied to measure a supplier’s performance.

15 Marks

May 2017, May 2015, March 2014

Answer

A

p.194

KPI’s can be drawn up to suit the needs of a particular contract. They state the performance goals in a way that is capable of direct, detailed, consistent measurement at operational level, using available data collection systems,.

Price
- Basic purchase price
- Value or % cost reduction
Quantity and compliance
- Reject, error or wastage rates
- Number of customer complaints
- Adherence to quality standards, environmental standard or ethical standards
Delivery
- Frequency of late, incorrect or incomplete deliveries
- Percentage of on time in full deliveries
Service/relationship
- Competency, congeniality and co-operation of account managers
- Promptness in dealing with enquiries and problems
- Adherence to agreements on after sales service
Financial Stability
- Ability to meet financial commitments and claims
- Ability to maintain quality and delivery

Question 34

Q

4*

(b) Explain TWO ways in which the use of KPIs can enhance the relationship between a purchaser and supplier.

10 Marks

May 2017, May 2015, March 2014

Answer

A

p.193

Improving communication between parties, where issues, or potential issues, were identified and therefore provided an opportunity for discussion
Helping to motivate the supplier through ensuring they know what is important and what they need to achieve to succeed;
A means of comparison between suppliers, provided it is used with the objective to encourage improvement;
Reduction of conflict where any issues identified were discussed and a collaborative approach to rectify was established.

Question 35

Q

4*

a. Explain THREE measures that might be included within a balanced scorecard

15 Marks

Nov 2017, Jul 2015, Nov 2014

Answer

A

The balanced scorecard approach is generally based on the work of Kaplan and Norton.

Measures that are included in this approach are:

Financial
- Financial Performance and the creation of value for the shareholders
Internal business processes
- how effectively and efficiently value-adding processes are carried out throughout the supply chain
Customers
- how effectively the organisation delivers value to the customer, and develops mutually beneficial relationships with customers and other stakeholders
Innovation and Learning
- the skills and knowledge required to develop distinctive competencies for future competitive advantage and growth

However it is also possible to create a balanced scorecard using relevant and appropriate financial and non-financial measures. For example, reject rates; On-time-in-Full (OTIF) deliveries, quality systems and cost savings.

Question 36

Q

4*

b. Explain ONE methodology for relationship assessment that can be employed by purchasers and suppliers

10 Marks

Nov 2017, Jul 2015, Nov 2014

Answer

A

p.177
 The supplier preferencing matrix which can be considered as a methodology to evaluate
and prioritise relationships with (internal and external) customers since actions can be taken to improve attractiveness to improve the relationship between purchaser and supplier.

It can also be used assess the purchaser’s own status as a customer to its suppliers: is it an attractive and valuable customers, or does it risk being explouted or terminated? can it increase its attractiveness or can it increase its volume and value of business?

p.32

The supplier preferencing Matrix illustrates how attractive it is for a supplier to deal with a buyer and the monetary value of the buyer’s business to the supplier.

Attractiveness | ————————————————————————

of buying | LOW | Nuisance | Exploitable |

organisation | ———————————————————————–

| | LOW | HIGH |

< ———–Value of Buyer’s Business——————->

NUISANCE

Neither attractive or valuable to do business with

Suppliers practising customer relationship management will regularly review their customer base and downgrade or cease service to unprofitable customers - or raise their prices (in such a way to turn them into exploitable customers)

EXPLOITABLE

These customers offer large volumes of business which compensates for lack of attractiveness

The supplier will fulfil the terms of the contract but will not go out of its way to provide extras (any extras demanded will be charged at additional cost)

DEVELOPMENT

These customers are attractive despite currently low levels of business

The supplier may see potential to grow the account and may court extra business by ‘going the extra mile’ in fulfilling contracts: if all goes well, the customer may be converted to core status

CORE CUSTOMERS

Core Customers are highly desirable and valuable for suppliers who will want to establish long-term mutually profitable relationships with them if possible

HIGH | Development | Core |

Question 37

Q

*4*

(a) Explain, using examples, THREE techniques that could be used for supplier development.

15 Marks

Jan 2018

Explain: Give reasons for, or account for something, so that it is clear or easy to understand

Answer

A

Better grades achieved when candidates not only identify and outline three techniques but, explain the usage of these based on their own experiences, their studies, and their wider business knowledge and acumen.

Secondment of purchaser’ staff to the supplier (or vice versa) to help train or correct errors, coaching, consultancy, support or liaison
Offering training for the supplier’s staff in relevant areas (technical aspects of the requirement or benchmarked best practice)
Loaning machinery, equipment or IT hardware for example the buyer providing electronic terminals to suppliers so that buyers can use purchasing cards, a buyer paying for a supplier’s manufacturing processes to be updated, in return for discounted supplies in future and a buyer giving an outsource supplier the machinery previously used to perform the activity in house.

Question 38

Q

4*

(b) Explain, from the suppliers’ perspective, ONE advantage and ONE disadvantage of supplier development.

10 Marks

Jan 2018

Explain: Give reasons for, or account for something, so that it is clear or easy to understand

Answer

A

Better grades achieved when candidates did not only identify the advantages/disadvantages but also explained the usage of these based on their own experiences, their studies, and their wider business knowledge and acumen.

Advantages;

Achievement of added-value outcomes such as to reduce costs, improve quality, reduced risk, timescales or to improve innovation, safety or sustainability working with their customer.

Also, commonly advantages linked to relationships including where improved performance could be achieved from a longer-term more closely linked relationship.
Disadvantages;

Time, effort and cost for the supplier, splitting focus between customers, becoming over-dependent on one buyer, or concentrating on satisfying on buyer at the expense of remainder.

Question 39

Q

4.*

Supplier relationship management includes the measurement of supplier performance.
Explain how supplier performance might be measured and assessed as the basis for improvement

25 Marks

Jan 2017

Explain: Give reasons for, or account for something, so that it is clear or easy to understand

Answer

A

Areas that could be measured include:

Price: basic purchase prices and measurement of changes and variations over time.
Quality and compliance: measures of reject or error rates, numbers of customer complaints, conformance to standards e.g. ISO.
Delivery: measures of frequency, and percentages of OTIF.
Service/Relationship: competence and cooperation of account managers, promptness of addressing enquires and issues.
Financial stability: ratio performance analysis of financial data.
Innovation capability: number of “new” ideas suggested, willingness to collaborate.
Technological capabilities: system availability and ease of use
Overall performance: benchmarking across sectors and other supplies

How to gather data to use in performance measurement and assessment process could include:

Observation and experience
Spot checks and sample testing
Business results
Customer and user feedback
Self-assessment collaborative performance reviews.

Approaches that could be used to support performance improvement could include:

Assess performance against Key Performance indicators (KPIs)
Successful delivery according to service level agreements (SLAs)
The use of Vendor Rating (VR) as a systematic post contract performance managing and review system
Benchmarking of all types – internal external, functional etc.
The use of Balance Scorecards - (reference to Kaplan and Norton ) – to measure and maintain a “balance” between a range of different performance measures (e.g. financial, learning and growth, short and long term )
The development of a continuous approach to the improvement of Performance (Kaizen)

Examples of content for merit/distinction grade answers:
Where candidates provided more than a basic response in relation to this question and who provided a greater level of detail other than just describing a range of measurement methods and processes including areas such as how it impacted improvement and/or any potential issues of measures they were generally awarded a higher mark. Importantly where candidates described how supplier performance was managed in practice including examples such as benchmarking approaches, typical KPIs/SLAs, or other methods to monitor performance such as site visits, customer feedback and self-assessment this gave an added dimension to the answer and often received very high marks.

Question 40

Q

1

(b) Suggest FOUR drivers of a collaborative relationship in supply chains.

12 Marks

March 2018, July 2015

Answer

A

Shorter Product lifecycles
- Trends change quickly - products go in and out of fashion quickly
- This created a need for faster product development, more product updating and responsive product customisation for examples new cellphones for different markets are released consistently
- This puts pressure on supply chain collaboration and communication
Outsourcing non-core activities to external contractors
- this enables companies to concentrate on core activities where they have distinctive competencies and they can add most value
- This creates a need for closer relationships in order to minimise risk
- This is done by retaining some control over
  - quality output and
  - other potentially reputation damaging issues (ie environmental and ethical performance)
Competitive pressures towards lean supply
- closer relationships and integration help to reduce waste in supply chains
- Partners can work together to identify and reduce waste ie
  - unnecessary activity
  - bottlenecks
  - delays
  - errors and rejects
  - excess inventory
- Closer relationships often result in integration of systems that streamline the transaction process
Best practice supply techniques
- like JIT and TQM reduce tolerance for delays and errors in the supply process
- It causes increased dependence on the supply chain and requires
  - stronger supplier relationships
  - closer integration of people, plans and systems internally and externally

Candidates who can identify a driver and then explain how it moved a relationship towards adoption of a collaborative approach in some level of detail generally receive more than a pass mark for this question

Question 41

Q

1

(c) Suggest THREE ways buyers could increase the ‘attractiveness’ of their business to suppliers.

9 Marks

March 2018, July 2015

Answer

A

Making payments on time and in full as well as considering the payment terms for the supplier
Providing the supplier with accurate demand and forecast data as well as regular updates to the supplier on what may happen in the future
Being accessible to the supplier and available to talk to them as and when needed

Where a candidate identifies a way in which a buyer could increase attractiveness and then proceeded to explain in greater detail why and how it would help achieve the desired outcome they received higher marks.*
Additionally, where candidates could provide examples from their own experience or studies it helped ensure a good mark is obtained.*

Question 42

Q

1

a) Explain ONE difference between internal and external commercial relationships

5 Marks

Jul 2018, Jan 2016

Answer

A

p.6

There may be conflicts of interest internally
- Staff/service functions are perceived to be bureaucratic and interfering in the more directly value adding line functions such as production and sales
- Different functions will prioritise their own priorities and objectives
- In external relationships; both parties want the relationship to succeed

Question 43

Q

1

b) Describe ONE relationship type that might be appropriate for:
i. a strategic procurement (6 marks)
ii. a routine procurement (6 marks)

12 Marks

Jul 2018, Jan 2016

Answer

A

i. A relationship type that might be appropriate for a strategic procurement would typically be a type from the closer, more collaborative end of the relationship spectrum which includes single sourced, strategic alliance, partnership or co-destiny.

These relationships would be appropriate for a strategic buyer because of the high value, high risk nature of the procurement.

These closer relationships would enable the buyer to work with the supplier to ensure continuity of supply; thereby reducing the risk of stock out and production downtime possibly causing profit loss and reputational damage.

Buyer and supplier may work together on cost reduction initiatives to positively impact on buyer organisations profitability (as strategic item is high value in relation to total spend, any saving has big impact on bottom line).

Collaboration, supplier development programmes and effective vendor rating systems with two way communication can ensure standards of quality for these high risk procurements.

These suppliers have been identified as dependable and so the buyer is unlikely to want to switch regularly as there is more benefit and added value achieved through collaboration.

ii. A relationship type that might be appropriate for a routine procurement would typically be from the distant and transactional end of the relationship spectrum including adversarial, Arm’s length, Closer Tactical or Transactional relationships.

These are appropriate relationship types for a routine buy due to the low value, low risk nature of the procurement.

Buyer aims to secure item through an efficient method without investing time and resources into relationship management.

Buyer is looking for cost effective option as procurement poses little risk to organisation.

Question 44

Q

1

c) One of the examples on the relationship spectrum is ‘single sourcing’. Explain TWO potential advantages and TWO potential disadvantages associated with this approach.

8 Marks

Jul 2018, Jan 2016

Answer

A

Advantages:

By developing a close collaborative relationship with the supplier it may lead to cost reductions and efficiencies through systems integration, innovation, co-investment and improvements in quality and continuity of supply
They may receive preferential treatment from supplier by being a ‘core’ or ‘developmental’ customer to them and even having an exclusivity arrangement creating competitive advantage
Using one supplier helps the buyer achieve minimum order quantities when only a small volume is required
There is the possibility of receiving volume discounts when ordering in bulk from single supplier
One supplier may be so far ahead in terms of reputation, quality or price that the organisation can achieve competitive advantage by using them.

Disadvantages:

With only one supplier the supply risk and supplier risk leave the buyer exposed
The supplier can become complacent, particular if the product is difficult or they believe the buyer will be reluctant to switch for convenience
The lack of competition could mean that the supplier believes they can increase prices
Therefore the buyer could be locked into an incompatible supplier contract and would miss out on opportunities that arise in the market.

Question 45

Q

1

(a) Draw the relationship spectrum indicating the likely position of an outsourced relationship.

9 Marks

Nov 2018, Nov 2013

Answer

A

Competitive ♦ Collaborative

<1————-2————–3————–4————–5————–6————–7—————8————–9>

Adversarial
Arm’s Length
Transactional
Closer Tactical
Single Sourced
Outsourcing
Strategic Alliance
Partnership
Co-Destiny

Question 46

Q

1

(b) Discuss FOUR advantages and FOUR disadvantages of an outsourced relationship for an organisation.

16 Marks

Nov 2018, Nov 2013

Answer

A

Advantages of outsourcing including:

Supports organisational rationalisation and downsizing
Reduction in costs of staffing, space and facilities
Allows focus on core activities and competencies which are distinctive, value adding and difficult to imitate
Gives access to specialist expertise, technologies and resources of contractors
Gives economies of scale as contractor can aggregate demand
Provides a competitive market solution where internal providers are not subject to the same market pressure.

Disadvantages of outsourcing including:

Additional costs due to contractor requiring profit
Possible difficulties with monitoring new contractors
Difficulty of ensuring quality and consistency of contractors
Loss of in-house expertise, knowledge and experience
Potential reputational damage due to loss of control of key performance area
Longer supply chains between the service provider and the end user (customer)
Problem of ‘lock-in’ with a contractor who is under performing
Loss of control of confidential data and/or intellectual property.

Question 47

Q

1

(a) Outline TWO advantages and TWO disadvantages for a purchasing organisation of having a partnership relationship with a supplier.

8 Marks

Jan 2019, May 2016, Jan 2014

Answer

A

Advantages:

Greater stability of supply, prices and costs
Sharing of risk and investments
Better motivation and trust

Disadvantages:

Risk of complacency
Risk of breaking confidentiality
Risk of ‘lock in’ to incompatible or ineffective supplier

Question 48

Q

1

(b) Explain the stages of the relationship life cycle using examples

17 Marks

Jan 2019, May 2016, Jan 2014

Answer

A

Birth: This includes selecting suitable suppliers based on a rational business case for a long-term relationship.
This will involve negotiation around each party’s expectations and the establishment of joint arrangements relating to contractual obligations, performance measurement, performance feedback and joint activities.

*Relationship growth**: Progressively upgrading the relationship through increased contacts, co-operation, closeness, trust (or mutual dependence), managing emerging issues and conflicts, breaking down barriers and checking that objectives are being met to the benefit of both parties.
*Maturity**: A separate stage of the relationship life cycle, maturity, can then be experienced. It is during this stage that conflicts become common place. At the end of this stage, problems may be experienced with the relationships that have developed and the next stage can then be experienced.

Relationship decline: Downgrading the relationships or disengaging from it. This could be for several reasons; takeover, merger or acquisition of either party by a third party, impact of technology, change of business strategy etc. The decline needs to be carefully managed as roles will need to be redefined and continuity of supply/service to customers maintained.

Termination: This needs to be completed constructively with a view to keeping the door open to a future relationship or further business should conditions change. The needs of both parties may change to make this possible. Lessons need to be learned for the future and unnecessary conflict avoided.

Question 49

Q

1

Explain, using an example of each, how the following external environmental factors impact on relationships in supply chains:

(a) Social

(b) Technological

(c) Economic

(d) Political

(e) Environmental

25 Marks

March 2019, July 2016, March 2014

a) Identify THREE external macroenvironmental (STEEPLE) factors and explain how each might impact on supplier relationships. (9 marks) July 2017, Nov 2015

Answer

A

*Social:** This factor might include the demographics of the supply market such as gender, age, ethnicity, population movements and education. These have an impact on the demand for products and services and therefore on the supply chains serving a particular constituency. Suppliers and buyers may need to work together to ensure that they understand the supply market and are able to adjust their products as needed
e. g. Nappies for a baby boom.

Technology: This factor might include the use of technology and how it has changed the way in which supply chains work; from making it easier to conduct business in remote parts of the world to enabling faster and more accurate communication between supply chain members e.g. increased email and use of web conferencing

Economic: This factor looks at a range of economic influences in the environment including recession and depression, exchange rates, and import taxes and duties. Where you have a situation where exchange rates change considerably it may result in products becoming too expensive from an existing supplier overseas and therefore an alternative sources, perhaps within your own country needs to be found. This could impact a number of long term relationships that suddenly become unviable.

Political: This factor relates to the impact of governments laws, political pressure groups such as trade unions and trade agreements. This may mean that an existing supplier may no longer be able to be used if there is a ban on trading put in place for certain countries or even products. This will mean that new supplier relationships may need to be determined e.g. the UK’s decision to leave the EU may impact a number of
relationship.

World economies into deep recession causing widespread employment and soaring budget deficits in many regions including the US and the EU. Dealing with these deficits reduced demand for products and services in most supply markets. Micro-economic theories attempt to explain how markets are structured and work. The behaviour of monopolies, duopolies, oligopolies and monopolistic competition tend to distort market operations in different ways some of which are proscribed in both UK and EU law. Each of these categories has an impact on supply chain relationships through the risks inherent in their structure. Impact on the supply chain might include commodity prices, availability of supply, market trends, power in negotiation.
These changes may cause relationships to be either closer or more distant. Candidates may develop either approach.

This is about the economic and social goals of government as well as wider legislative blocs such as
the EU, AU, EAEC, ASEAN etc. Government is also a major employer in both producing goods but mainly services on which its population depends. It also operates as a major buyer in many supply markets with which it tends to have formal and arms-length relationships. Government gives support to industry in the form of grants and loans in pursuit of both economic and political objectives. As the chief source of legislation it is influenced in this direction by many interest groups including other governments, businesses, charities, religious groups, research organisations and lobbyists. Political factors can exert a significant influence on the ways that supply chains operate and depending on the example chosen, can create collaborative relationships or induce greater competition between different organisations that operate in a supply chain.

Environmental:

The natural environment covers factors such as legislation, government targets in relation to environmental protection and sustainability, issues of pollution, waste management, recycling and disposal as well as consumer demand for eco-friendly products and business processes. Where the environmental factors become of high importance to a particular market all the suppliers in that market will need to
incorporate this into their procedures e.g. the supply of sustainable sources of timber.

The natural environment covers factors such as legislation, government targets in relation to environmental protection and sustainability, issues of pollution, waste management, recycling and disposal as well as consumer demand for eco-friendly products and business processes. These all impact on materials specifications, supplier selection and management, the planning of logistics together with compliance and risk management. The need to achieve standards set for sustainability can often help to create more collaborative relationships in supply chains as organisations will need to work together to achieve set targets.

Question 50

Q

2

(b) Explain the following in relation to non-performance of a contract:

i) Substantial performance

ii) Acceptance of partial performance.

10 Marks

Jan 2018, Jan 2014

Answer

A

i. Substantial performance (p. 103)

Where the supplier substantially performing their obligations under the contract. In these circumstances, the supplier is entitled to be paid the agreed price less an amount that reflects the part not properly executed.

Refer to Hoenig v Issacs (substantial performance)

If the defects are so extensive that it cannot be said that the contract has been substantially performed, however, then no part of the contract price can be recovered.

ii. acceptance of partial performance (p. 102)

The acceptance of partial performance applies when a supplier is in breach of a contract and the buyer is not obliged to accept what they have delivered.

Where the buyer decided to accept what has been delivered e.g. accept a partial delivery, then they would be expected to pay for that element, however, where there was no option but to accept the partial performance then payment would not be required.

eg Sumpter V Hedges (partial performance).

Question 51

Q

2

a) Outline FIVE areas where the standard contract terms of a buyer and a seller are likely to be different

15 Marks

Jan 2018, Jan 2014

Answer

A

Price clause e.g. price escalation clauses vs. requirement for a fixed price e.g. The buyer’s standard terms may stipulate a fixed price, while the seller’s standard terms may allow for price variation. Is the price fixed or subject to some form of escalation clause?
Payment terms e.g. days required for payment, advance payment or instalments. Supplier’s terms are likely to be shorter than a buyer’s terms. Is there any provision for advance payment or instalment payments? Can payment be withheld for poor or non-performance? How is payment to be made, what credit facilities are available?
Passing of title e.g. retention of ownership until full payment is received vs. on delivery. A supplier usually attempts to retain ownership as long as possible through retention of title clause. This acts as security against non-payment. A buyer will want ownership transferred as soon as possible so it is free to do as it wishes with the goods.
Passing of risk e.g. who bears the cost for insurance and where it transfers from one to another. A supplier will want to transfer risk early and a buyer as late as possible.
Intellectual Property e.g. does the supplier retain this right vs. work done on behalf of the buyer passes to the buyer
Termination provisions: A buyer may specify detailed termination provisions allowing for termination for minor breach of contract. A supplier will want to restrict the grounds for termination, especially if it is a long-term contract where the supplier may have invested substantial time and capital.
Rights on late, poor or non-delivery: This will determine a buyer’s rights for poor or late performance. A buyer may want a time is of the essence clause whereas a supplier may reserve the right to deliver late or not at all.

Question 52

Q

2

(a) Explain the difference between vital and non-vital contract terms.

16 Marks

March 2018, July 2013

Answer

A

Each term of a contract can be classified as either a ‘condition’ or a ‘warranty’. A condition is a vital term of the contract, breach of which may be treated by the innocent party as a substantial failure to perform a basic element of the agreement.
A warranty is a less important or non-vital term which is incidental to the main purpose of the contract. Breach of a warranty does not constitute a substantial failure of performance.
In the case of a breach of a condition the innocent party has a choice of treating the contract as repudiated (or ended) and claiming damages for any loss suffered – as an alternative to merely claiming damages for the breach. In the case of a breach of warranty, however, the whole agreement need not collapse/cease/ended but rather; the innocent party may therefore claim damages for the breach, but cannot repudiate/end/terminate the contract.
eg comparing the procurement of a washing machine that did not wash and a washing machine with cosmetic damage

Question 53

Q

2

(b) Discuss, with examples, implied terms in contract law.

9 Marks

March 2018, July 2013

Answer

A

Implied terms are those that are not expressly included in the contract by either of the parties, but which are nevertheless assumed to exist (e.g. by virtue of common law, statute or custom), and therefore form part of the contract. In other words, in contract management, the printed terms and conditions cannot be viewed in isolation. eg the Sale of Goods Act (1979).
Common law – This can be by the nature of the contract e.g. an employment contract implies certain duties of an employer and employee, such as a fair day’s work for a fair day’s pay.
Statute – Legislation or Acts of Parliament. An example of statute law such as Sale of Goods Act 1979 or Unfair Contract Terms Act 1977 was expected.
Custom – This would be the custom of the trade. E.g. Foley v Classique Coaches (1934) In this case the court held that practice indicated what was to be implied, indicating a term which the parties intended to adopt but did not express. Candidates may give answers from their own country’s jurisdiction but need to explain the case and how the terms were implied.

Question 54

Q

2

(a) Outline the factors that will determine whether a “representation” becomes a term of a contract

15 marks

May 2018, March 2017, March 2014

Answer

A

When representation becomes a term, and if it is then subsequently found to be false, it is possible to sue for breach of contract rather than misrepresentation.
The length of time between the statement being made and the contract being formed
The importance of the statement to the recipient
The expertise of the person making the statement had special skills or knowledge
Whether the validity of the statement is checked
Whether the statement is put in writing after it is made
If the parties agree that the representation should form part of the contract.
Refer to relevant case law such as Bannerman v White, Schawel v Reade, Dick Bentley Productions v Harold Smith,
Oscar Chess V Williams or other relevant case law.

Question 55

Q

2

(b) Explain the advantages and disadvantages of using model form contracts

10 marks

May 2018, March 2017, March 2014

Answer

A

Advantages include;

Helps reduce the time and costs required for contract development (including legal costs)
Avoids reinvention of the wheel but can be adapted to suit individual circumstances
Widely accepted within a particular industry so reducing negotiation costs
Designed to be fair to both parties although this is debatable
Contract likely to cover most issues arising in that industry.

Disadvantages include;

A more powerful buyer or supplier may be able to negotiate more favourable terms
The buyers or suppliers requirements may not always be covered by model terms
Legal advice might still be required if significant amendments are made to the Model Form contract which could result in increased cost and delay
Training in the use of Model Form contracts may be required

Question 56

Q

2

(a) Explain THREE legal remedies available to a purchaser when a breach of contract occurs.

15 Marks

Jul 2018, May 2017, May 2015

Answer

A

Damages:

This may be defined in terms of money compensation that reflects the breach and is
available irrespective of the severity of the breach. These should be compensatory not punitive and could take the form of Liquidated (capped) or unliquidated damages payable to the injured party.

Termination of the contract:
If there is a breach of a condition of a contract, or if there is a termination clause that
allows for breach, this remedy could also apply.

Specific Performance:

This is an equitable remedy, where a court order could be made to require a party to
perform its obligations under the contract. It is not available for all situations, and
where the goods or services were of a unique character e.g. a painting or land, and where damages were not an adequate remedy this could be granted.

Injunction

Another equitable remedy, where court order is given usually requiring one of the
parties to stop doing something (prohibitory injunction) or occasionally an injunction
ordering a person to do something (a mandatory injunction). This may be used if a
supplier has given advance warning of an intention to break the contract.

Question 57

Q

2

(b) Outline the main drawbacks of litigation as a method of resolving contractual disputes.

10 Marks

Jul 2018, May 2017, May 2015

Answer

A

Costly form of dispute resolution.
Time – court cases tend to be long and drawn-out.
Takes place in a public arena where the press are available possibly resulting in reputational damage.
May not be suitable for international contracts since different laws, procedures etc. would apply.
Adversarial in nature with a win-lose mentality – there is no guarantee of success.
The adversarial approach may permanently damage buyer/supplier relationships.
Courts may find it difficult to assess complex technical disputes.
Formal process with strict compliance to recognised procedures.

Question 58

Q

2

(a) Explain the circumstances in which a contract will come to an end through frustration.

13 marks

Nov 2018, July 2017, July 2014

Answer

A

Stronger answers correctly identified how the doctrine of frustration differed from the general rule relating to breach of contract and the award of damages. The definition was then often supported by examples of when non-performance of a contract would be covered under frustration. Higher marks often referred to relevant case law or legislation including Cutter v Powell (1795) and Taylor and Caldwell (1963).

Question 59

Q

2

(b) Discuss the factors that the courts would consider when assessing unliquidated damages.

12 marks

Nov 2018, July 2017, Jul 2014

Answer

A

The remoteness of the damage and is it sufficiently linked to the breach of the contract
The measure of the damages to determine the amount which can put the claimant to the position they would have been had the contract been performed as expected

Explain the difference between liquidated/unliquidated as well as demonstrate a good understanding of the two main questions. Provide examples of the type of areas that may be considered when assessing amounts of unliquidated damages payable and referred to relevant cases e.g. Hadley v Baxendale (1854) and Brace v Calder (1895), either by direct citation or by description of the situation and outcome.

Question 60

Q

2

Explain the additional legal issues that may arise international supplier rather than from a domestic supplier.

25 Marks

Jan 2019, Jan 2016, May 2014

Answer

A

Legal issues around offer and acceptance maybe different and reference to the Vienna convention and give a brief explanation of the UN’s desire to harmonise laws relating to contract formation and contractual performance.
Applicable law and jurisdiction which is normally covered by a suitable applicable law clause in the contract which is agreed in advance as it could vary substantially. Arbitration on an international basis may be required to settle disputes.
Additional contracts and documents required, a contract of carriage and a contract of insurance and answers which explained the role of the bill of lading and letters of credit were recognised with marks.
Incoterms were explained in terms of how the transfer of risk was covered by the use of specific terms.

Question 61

Q

2

a. Despite there being several elements to a legally binding contract there are also a number of factors may render a contract invalid. Describe THREE factors that may lead to contract being invalid.

15 Marks

March 2019, March 2016, Jan 2014

Answer

A

Typically candidates selected three from either of the following factors
misrepresentation, mistake, duress /undue influence and illegality or referring to elements of contract formation e.g. offer, acceptance, consideration, capacity and intent. 5 marks were available for each of the three elements correctly identified and appropriately described.*

Question 62

Q

2

b. Distinguish between conditions and warranties in contract terms.

10 Marks

March 2019, March 2016, Jan 2014

Answer

A

Conditions are the major terms of the contract that go to the very root of the contract and are the essential terms. Breach of a condition means there has been a substantial failure to perform a basic element of the contract. The main remedies available are repudiation of the contract and damages. Examples of types of conditions that can be typically found such as “time is of the essence” clause to ensure a delivery date is a condition.
By contrast warranties are minor terms, subsidiary to the main purpose of the contract. Breach is not considered to be a substantial failure of the contract. A breach of warranty allows the injured party to a damages claim only, not repudiation.
It is sometimes difficult to determine whether a particular contract clause is a condition or a warranty (innominate terms).
Typical cases might include Poussard V Spiers or Bettini V Gye, and examples included equipment not working compared to cosmetic damage.

Question 63

Q

3

Explain how a purchaser might assess and then manage FIVE different contractual risks.

25 Marks

March 2018, July 2014

Answer

A

p. 141

Identify the risks to seek and identify potential problems or area of uncertainty by using the following processes:
- Scanning the environment
- Formal risk analysis
- Critical incident investigations
- Consulting with key stakeholders
- Consulting with specialist risk management consultants.
Once identified the risk needs to be assessed and approaches such as “likelihood x impact” where the
likelihood of a risk happening is assessed alongside the impact or consequence of a risk.
Five contractual risks could be:
- Internal risks
  - External risks
  - Supply market risks
  - Financial or economic risks
  - Legal and compliance risks
  1. - Performance based risks
  - Risks in international sourcing
  - Reputational and relationship risks
  - Supplier switching risks
  - Information risks.

Question 64

Q

3

(a) There is a range of risks that an organisation needs to address in its sourcing policy.

Describe THREE areas that might be included in atypical ethical sourcing policy

15 Marks

May 2018, March 2017

Answer

A

An ethical sourcing policy could cover a range of areas depending on the risk and issues raised by the organisations activities and markets. Typical areas included;

Promotion of fair, open and transparent competition in sourcing (and the avoidance of unfair, fraudulent, manipulative or coercive sourcing practices)
Use of sourcing policies to promote positive socio-economic goals such as equal opportunity and diversity in the supply chain; support for local and small business suppliers; and minimization of transport miles (to reduce environmental impacts and carbon emissions)
The specification and sourcing of ethically produced inputs e.g. certified as not tested on animals; drawn on sustainability managed or renewable sources; or manufactured under safe working conditions
The selection, management and development of suppliers in such a way to promote ethical trading, environmental responsibility and labour standards at all tiers of the supply chain e.g. by pre-qualifying suppliers on CSR policies, ethical costs, environmental management systems, reverse logistics, recycling capabilities, supply chain management; and incentivising, monitoring and developing supplier ethical performance
A commitment to supporting the improvement of working terms and conditions throughout the supply chain
Sustainable profit-taking by suppliers e.g. not squeezing supplier profit margins unfairly and to ensure that fair prices are paid to suppliers back through the supply chain, particularly when buyers are in a dominant position
Adherence to ethical frameworks and codes of conduct of relevant bodies such as ILO
(International Labour Organisation), Fair Trade Association or Ethical Trading Initiative, International standards such as ISO26000: 2010 or the Codes of Ethics of relevant professional bodies such as CIPS
Commitments to compliance with all relevant laws and regulations for consumer, supplier and worker protection.

Answer 65

A

Reputational
Performance
Legal
Loss of business or customers
Poor relationships

Stronger responses built on the identification of a risk and provided a reasonable level of detail on the implications and effect of such a risk.

Answer 66

A

Market Risks - e.g. monopoly suppliers, IPR issues, collusive suppliers;
Economic Risks - e.g. runaway inflation, exchange rates, lack of investment;
Legal Risks - e.g. challenge from unsuccessful bidders, breach of Regulations;
Ethical Risks - e.g. collusive suppliers, corrupt staff, poor vetting;
Sourcing Risks - weak evaluation criteria, poor research, lack of transparency;
Performance Risks e.g. - too little capacity with suppliers, logistical problems, climatic issues.

Stronger responses built on the identification of a risk and provided a reasonable level of detail on the implications and effect of such a risk.

Answer 67

A

i. Internal risks were typically described as risks from factors within the organisations control and typical examples included system breakdown, human error, malicious activity, industrial action etc.
ii. Market risks were generally explained as stemming from market structures such as monopolies, power imbalances or alternatively from changes in market circumstances such as uncertain supply, poor quality or long lead times.
iii. Economic risk stem generally from financial controls or changes in economic structures, both which were correct depending on the direction the candidate chose to explain. The impact of financial penalties, inadequate investment appraisals and changes in financial regulations were acceptable. However, where candidates chose to explain the macro-economic risks to contract examples such as boom and bust cycles, exchange rates and devaluation of currencies were equally acceptable.
iv. Legal risks can stem from poor contract management and/or approaches to tendering and contract award procedures. Additionally, where candidates chose to explain legal changes in the macro environment examples of changes in laws or political influences were often used.
v. Ethical sourcing risks emerge when these are not considered by an organisation or a supply chain. Organisations were increasingly benefiting from decisions to source ethically, e.g. sustainable sources of raw materials, fairness in trading, unacceptable labour practices etc. However, an organisation may find itself at risk when their extended supply chain failed to uphold such sourcing standards.
* Good approaches began with an explanation of the risk and candidates then supported this with examples.*
* Candidates who provided extra details and discussion points about each of the areas, often giving examples from their own experiences or studies as well as often providing details as to how the risk could be mitigated obtained higher marks.*

Answer 68

A

the right numbers of people involved in the contract management process to manage the key elements of the contract including performance, data management, finance etc.
the right range and balance of skills for the people available, available at contract management activities such as negotiating, and chairing contract management meetings
the right knowledge of the subject matter of the contract, and of the people and personalities involved on both the contractor’s side and within the buyer’s own organisation
enough time resource to do a thorough job of contract management
enough financial resources to allow for effective research (such as D&B reports), and for travel to appropriate meetings and sites, where needed and the ability and finance to host and entertain if appropriate and ethical
Access to sufficiently skilled expertise resources where needed, such as Legal experts, Technical experts, Financial analysts, etc.
The availability of equipment to carry out the contract. These may include IT systems to manage contract information and data, IT hardware etc.
Data is a key resource in the contract which the contract manager will have to collect, manages, and control
The contract may require specialist equipment resources to enable it to be carried out
The contract will require a wide range of resources in terms of materials and goods. The key aspect of the contract manger’s role is the management of these resources

Answer 69

A

Clear governance and clear communications will be better served if the lead responsibility for on- going contract management resides with whichever function of the buying organisation.
Similarly the services may be used wholly by one part or one function within the buying organisation and that part may have the expertise and technical insight to best be able to know and to monitor whether the maintenance provider is doing a good job or not.
There may be limited resources available in the procurement function of the buying organisation making it simply unfeasible for the procurement function to resource sufficiently the on-going contract management.

Answer 70

A

Key elements to consider when discussing Financial data are:
 Budgetary control data can illustrate how much progress has been made, where money is being spent, where costs are being incurred, where savings might be made, etc.
 Supplier quotations, bid documents, price schedules, fees and charges and payment terms show what is included or not included in ‘the price’. This helps monitor price stability, when payments are to be made and to allow comparison with other suppliers.
 Records or estimates of losses incurred as a result of delays, defects or other non-conformances. This helps identify where losses may be made and where costs should be recovered from the supplier.

Key elements to consider when discussing Technical data are:
 Design and engineering compliance – this will be measured through the reject rate of the supplied components. This is usually measured as a percentage of the volume supplied but in one-off project demand there is no room for any level of rejection and failure to meet design and engineering compliance may mean that the supplier may be no longer required in the future.
 Tolerances – This is a variance from the specification that is seen as being acceptable. Engineering tolerances are usually very narrow whereas service tolerances e.g. answering calls within 6 rings may be broader. Failure to meet the tolerance levels will be monitored and reported as part of the performance measurement of the contract.
 Ability to produce samples and replicate the attributes for production use.

Answer 71

A

Feedback to supplier results of vendor rating highlighting areas that require improvement allowing the supplier to instigate and implement improvements
Feedback to supplier a ‘league table’ highlighting their position and the reasons for their lower position (assuming they are not top)
Supplier development initiative such as providing capital, loaning machinery, providing technical assistance through seconding technical staff for support, providing progress payments, clarifying performance goals or enhancing relationships through better communication systems
Suppliers can be motivated to perform to certain standards via incentives and rewards (the ‘carrot approach’). However, buyers need to be careful as operated negatively, threatening sanctions or penalties will have the opposite effect
Improve supplier commitment, co-operation and loyalty by jointly agreeing expectations, KPIs and/or service level agreement. These are used to provide measure performance incentives and penalties
Cultivating personal contacts and networks, building trust and goodwill on each side
Maintaining positive, relationship-building contacts and communications with suppliers, possibly via account managers
Ethical, constructive, collaborative and, where possible, ‘win-win’ negotiation to resolve relationship and performance problems
Securing the commitment and sponsorship of senior managers in both organisations, providing influential support for co-operation within the supplier organisation, and the potential for escalation of conflicts or disputes to higher levels

Answer 72

A

p.198

Benchmarking has been defined as:

The practice of comparing an organisation’s performance against others to stimulate improvements in operating practices.
It can be used across all of the organisations’ departments and it can also be the comparison of departments or site within an organisation.
It can be used to help clarify where you stand in relation to others, in those practices which matter most to the business.
The technique can also be used to help companies become the best in the world in the most important aspects of their operations.

Add examples

Answer 73

A

Internal benchmarking: Comparison with high performing units in the same organisation. For example a divisional purchasing function could be compared with a higher performing purchasing function of another division in the same group.
Competitor benchmarking: Comparison with competitor who perform well in key areas which provides them with superior competitive advantage. For example, a large supermarket chain comparing logistics performance with another large competitor.
Functional benchmarking: Comparison of similar functions with another high performing organisation in a different industry.
Generic benchmarking: Comparison of business processes across functional and industry boundaries. The benchmark may be set by excellent companies, learning organisations, ethical leaders or exemplars of whatever the attribute the firm is interested in.

Answer 74

A

Balanced scorecards are an attempt to provide a more rounded and comprehensive picture of the performance of an organisation that one which emphasizes a short-term view, limited to a single dimension such as finance.

Identify a range of perspectives that could form part of this balanced approach including finance, internal business processes, learning and growth and a customer perspective.

Answer 75

A

p. 197

i) Vendor rating

Systematic post-contract performance appraisal and evaluation to measure supplier performance using agreed criteria or KPI’s

A common approach is based on the use of a supplier performance evaluation form. It is a checklist of key performance factors against which purchasers assess the supplier’s performance as good, satisfactory, unsatisfactory.
Another method is the factor rating method. This gives a quantified, numerical score for each key assessment factor eg for quality performance the measure could be ‘100% minus % of rejects in total deliveries’. Each of the major factors is also given a weighting to end up with an overall score or rating.
Neither approach diagnoses the causes of any performance shortfalls identified or how to address them. The vendor rating system should be seen as a component of the entire performance management process

ii) Supplier appraisal (p.170)

There is a need to appraise or evaluate potential suppliers in order to assess their capability and suitability, prior to entering into negotiation or other processes for supplier selection and contract award.

It may be a costly process and not suitable in all instances. It is particularly important for

strategic and non-standard items,
high value purchases,
potential long term relationships
international sourcing and outsourcing and
for supplier development and quality management

It can cover a wide and complex variety of factors that a buyer may consider essential or desirable in its suppliers. Criteria should be related to the requirements of the particular buying organisation and procurement type but general the 10C’s (adapted from Ray Carter’s original framework) will be suitable.

iii) Supplier development (p.210)

May be defined as an activity the buyer undertakes to improve a supplier’s performance/capabilities to meet the buyer’s short-term or long-term supply needs
Hartley and Choi identify two overall objectives:
- Raising supplier competence to a specified level (eg in terms of reduced costs, improved quality or delivery performance).
  - Results oriented development programmes focus on solving specific performance issues - the buyer supports the supplier in making step-by-step technical changes to achieve pre-determined improvements
- Supporting suppliers in self sustaining required performance standards through a process of continuous improvement.
  - Process oriented development programmes focus on i_ncreasing the supplier’s ability_ to make their own process and performance improvements, without ongoing direct intervention from the buyer.
  - The buyer supports the supplier in learning and using problem solving and change management techniques
  - The process of kaizen or continuous improvement is an important aspect

iv) Relationship assessment (p.177)

Purchasing must assess whether and how far its relationship with a supplier is satisfactory in order to provide feedback for learning and ajustment. This may be done by

supplier performance evaluation ie if the supplier is underperforming there might be a problem with the relationship
how it is managed

However aspects of the relationship itself may be the subject of appraisal or of procurement’s own performance appraisal.

Supplier mapping is a way of analysing, classifying and prioritising relationships to decide which relationships are most valuable and profitable for the organisation and worth concentrating investment of time and money in. Various methods can be used such a Krajlic’s relationship matrix and the supplier preferencing matrix.

Answer 76

A

Description of the services to be delivered
Response times
Quality levels expected
Roles and responsibilities for services, risks and costs
Measures and procedures for monitoring
Complaints procedures
Process for review and the frequency of these
Dispute resolution procedures

Candidates who correctly identified a valid element and then used examples or provided additional depth from “real” life examples to demonstrate their understanding achieved higher marks.

Answer 77

A

Observation and experience
Spot checks and unannounced inspection
Sample testing to ensure achievement of standard expectations
User feedback
Analysis of complaints
Review of business results and performance against set standards
Electronic performance monitoring through technology such as RFID or clocking in/out
Self-assessment by the provider
A collaborative performance review

Candidates who provided more than just correct identification of a mechanism or technique and provided examples to demonstrate situations when these techniques were appropriate or how they could be used to assess performance generally received higher marks.

Answer 78

A

Developing the ideal number and range of suppliers in the purchasing organisations supply base. The ‘optimum’ range will vary from one organisation to another. Optimisation can mean that the supply base is either rationalised or broadened.
The supply base can help to develop more collaborative relationships. Narrowing the supply base means that the buyer has fewer relationships to manage and so can allocate resources required to proactive development of trusted supply partners. However, having a particularly narrow supply base comes with risk. ‘All eggs in one basket’ mean that the buyer at risk of continuity of supply if a risk event were to occur, and that buying organisation is at risk of over-dependence of the supplier on the buyers business creating ethical issues and potential reputational risk.
Broadening the supply base assists the buyer in mitigating risk. Having more, pre-qualified suppliers who are able to meet the buyers needs will mean that the buyer has options available should supply risk such as political unrest or unforeseen peak in demand risk events occur. The buying organisation has ‘back up’ suppliers that mitigate risk.

Answer 79

A

Supplier tiering is developing closer, long term partnership relationships with few trusted suppliers who form tier one in the supply chain structure. In the case of manufacturing, each tier one supplier would have an extensive role to play in the manufacturing of a finished product. To do this the tier one supplier would use a further tier of suppliers - tier two; from whom they would procure components. Tier one would be delegated extensive responsibility to manage tier two suppliers so that the OEM’s role in supplier management is reduced to the few tier one suppliers, with the knowledge that tier one suppliers are effectively managing the lower tier on their behalf. This, therefore enables the OEM to develop a closer relationship with Tier one suppliers because time and resources are freed up to focus more proactively on these few crucial suppliers for relationship improvement. Supplier tiering can be used as a means of achieving supply base rationalisation.

The advantages identified that tiering is used as a tool for relationship improvement through:
- Rigorous process of supplier selection of first tier suppliers as their crucial role is recognised in a tiered structure
- Fewer relationships to manage mean that procurement can focus attention on managing and developing these relationships
- With a more proactive approach; procurement can work with tier one suppliers to develop supply chain improvement and innovations through closer working, better information sharing and utilising the expertise of tier one suppliers.
There are also negative impacts in supplier tiering that relate to their long term nature. These include:
- over time, without a positive engagement, relationships are likely to decline
- relationships may become cosy and non-challenging with no external forces acting on the relationship
- Procurement staff, despite the length of the relationship, should drill down into lower tiers to gain a full understanding of the supply chain. This may be resource intensive.
- Dependency issues may make the relationship difficult for either party to exit.

C**andidates who provided a diagram to illustrate supplier tiering generally were able to explain the term well where they elaborated on the information shown.

Answer 80

A

Lack of support from senior managers - director may be reluctant to enter into partnership type relationship with a particular supplier and so may prevent resource allocation for development
Adversarial approach by the buyer when a collaborative approach is necessary to form a lasting relationship built on trust
Lack of trust between buyer and supplier leading to a failure to share information which is one of the building blocks of a closer relationship. Parties cannot grow closer and better meet the buyer’s needs if they are not kept informed.
Changes of personnel can lead to loss of the relationship and established contacts and shared knowledge
Repeated failure of the supplier to meet KPIs may lead to dissatisfaction and contract dispute
Incompatibility of culture, such as one party who is technologically advanced and the other who is still operating on a manual level
Incompatibility of values such as one party’s recognition of the need to adopt an ethical supply chain that is free from modern day slavery and use of child labour, while the other organisation is purely profit driven and does not recognise their responsibility to their own workers or those further upstream in the supply chain
The risks involved in developing a close relationship with one supplier when their competitor is developing innovative new products or methods
The costs involved in developing the relationship; the resources allocated and investment in systems integration
Conflicts of interest between the two parties
Dependency issues raised by one party being more powerful that the other and so an over-reliance, possibly raising ethical issues.

Answer 81

A

p.168

Contract mamagement concernsthe management of individual supply contracts and supplier relationship management concernts hte management of relationships with suppliers

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