L4M4- Chapter 2- Processes for supplier analysis

Question 1

How can a procurement professional understand and breakdown their spend budget?

Answer 1

Pareto principle of 80:20

Split into ABC analysis

Divides suppliers up by their spend/importance

Question 2

What is the CIPS relationship spectrum and what is it used for?

Answer 2

A model for positioning relationships. It goes from adversarial and transactional to collaborative and co-destiny

The axis are commitment to the relationship from the buyer and commitment to the relationship from the supplier

Would include trust, transparency, info sharing, risk management, communication

Question 3

What is an index?

Answer 3

An index or indices are recognised factors that are designed to represent the broader macro trends of a collection of products or industry. E.g. the US stock market uses NASDAQ which is the stock market

Often used by procurement to measure economic data for a point of comparison

Question 4

What would be the impact if an indices is showing prices rising?

Answer 4

If the prices are rising it probably means that demand is greater than supply. So if a buyer were to engage with a supplier to buy a new product when the price is high then it is likely that it is an inflated price or that stock wont be available (because demand is high).

It could also be an indicator of when not to change suppliers, if the price is high and demand is high, then you may want to work with your existing supplier

Question 5

What are the 5 main trading categories of commodity pricing? MALEE

Answer 5

Agriculture
Energy
Metals
Livestock
Environmental credits

Question 6

What can affect commodity pricing?

Answer 6

Supply and Demand
Currency fluctuations
Political situation
Conflict
Force Majeure- e.g. earthquakes affecting supply
Severe weather/seasonality
Competitor pricing (monopolies drive price up, competition drives prices down)
Price of substitutes
Speculation

Question 7

What is a hedge?

Answer 7

Taking a position on current stock or future stock to offset potential losses should the price rise. A hedge will have a cost of trading and may use a financial contract.

AKA
An investment made with the intention of reducing risk of adverse price movements in an asset

Question 8

What is speculation?

Answer 8

This is where you actively pursue risks to make gains when the commodity price moves

Question 9

What data sources can be used to forecast prices of commodities?

Answer 9

Previous/historic data
Supply and demand
Global events
The state of the economy

Question 10

What is a futures exchange?

Answer 10

An agreement where the seller of a commodity agrees to sell or buy a certain amount of a commodity for a certain price on a specific date in the future

By locking in prices for future dates, they can protect themselves against market prices that would impact their bottom line.

Buyers can look at future data to forecast the likely price in the future, and give likelihood if the price is going to increase/decrease and therefore get value for money

Question 11

What are some examples of places you could conduct a futures exchange?

Answer 11

LME- London Metals Exchange
NASDAQ
CME- Chicago Mercantile Exchange
ICE- Intercontinental exchange

Question 12

What is the difference between primary and secondary data?

Answer 12

Primary data is data that comes directly from the source e.g. direct comms, networking, commissioned market research.

Secondary data is data that has been previously collected and used for a new requirement, it is generally published research e.g. indices, internet, magazines, surveys, professional bodies

Question 13

How can primary and secondary research be distored?

Answer 13

Primary = researcher bias

Secondary= More channels of comms means more opportunity for it to be mistranslated

Secondary can be used to validate primary research

Question 14

Financial statements can be used by procurement to understand stability of a potential organisation, but what are the limitations of using them?

Answer 14

Figures are historic, so cannot give an accurate conclusion for the future
Economy can change over the duration of a contract making financial ratios incorrect
Supplier may have made operational or other changes (e.g. new products, new org structure etc)

You can assess current performance in a simple way mid contract by looking at the quality, customer churn, staff churn, rumours, payment requests and any change of bank

Question 15

What is a credit rating and who provides data for it?

Answer 15

Assessment of the financial stability of an organisation. it gives a score that reflects the level of risk an organisation poses when dealing with other businesses. If the score is low then it suggests a high level of risk

Banks
Lenders
Creditors
Public info
Financial reports
Court judgements for debt

Question 16

Which data points are used to give the weighted credit score?

Answer 16

Weighted is just a way of measuring the credit score with emphasis on important areas.

Payment history (most important)
Amounts owed
Length of credit history - what is the average repayment time taken for debts
New credit
Credit mix (least important)

Question 17

How could a supplier have high financial risk but not due to poor credit?

Answer 17

New organisation recently set up
No loans or credit cards
No high value assets (as these can suggest good stability as assets can be sold to pay debts)

Question 18

What is the aim of ITT or RFQ?

Answer 18

Establish which supplier can offer goods/services for the best value for money

Question 19

What are the differences between ITT and RFQ?

Answer 19

RFQ
Less formal
Less complex requirements
Less detail
Low-medium contracts

ITT
More formal
More complex
More detail
Medium- high contracts

Question 20

Why advertise a contract?
Which factors influence how you advertise?

Answer 20

It brings in more opportunity for comparison of goods/services (which does have the negative of creating more work)

Advertise based on@
Value of contract
Strategic importance
Urgency of contract
Resources available

Question 21

Where would you advertise a contract?

Answer 21

Professional magazines
Business journals
Newspapers
Supplier Websites - this is common in private sector where there is less restriction
Specialist tender portals e.g. the public sector may use ‘Contracts Finder’ for anything worth over £10k

Question 22

What is an RFI?

Answer 22

A document used to gather information about suppliers and their capabilities prior to formal tendering/ procurement process.

A PQQ is a form of RFI

Question 23

What is typically found in an RFI?

Answer 23

Financial position
Capabilities
Capacity
Mission and vision
Ethical/sustainability policies

It helps procurement find the number of capable suppliers who have capacity, the competition in the market and acceptable lead times.

Question 24

What is typically found in an RFQ?

Answer 24

Specifications
Drawings
Samples
Quantities
Delivery requirements
Contract length
T&Cs
Evaluation criteria

Question 25

What is an RFQ?

Answer 25

Getting quotes from suppliers that allow a procurement team to identify who best provides the 5 rights of procurement and can fulfil the need with the best value

Question 26

What is the purpose of an RFQ for the organisation?

Answer 26

Aligns to corporate strategy- procurement are doing it to align to the org objectives

Fair and transparent process- all suppliers receive the same information and have the same chance to win

Any supplier can bid

Procurement can evaluate the market effectively and achieve the best value for money (if you always use the same supplier they may become complacent)

Question 27

What is the difference between an RFI and an RFQ?

Answer 27

RFI
Objective is to learn about suppliers
sent to a large and varied supply base
Informal
Generic

RFQ
Objective to obtain cost comparisons
Sent to prequalified suppliers
Achieves best value
More formal
Specific

Question 28

When would the restricted tendering approach be used?

Answer 28

Restricted tendering is where the opportunity to tender is first advertised allowing suppliers to express interest (maybe also fill in a PQQ) and only those that meet criteria will receive the full ITT. It is a 2 stage process.

This is used when:
- Interest is expected to be high
- There are stringent selection processes
- There are a known number of suppliers to involve

Question 29

Why is it beneficial to do tenders with the support of cross functional teams?

Answer 29

It ensures the needs and opinions of all teams are involved e.g. logistics, operations, Sales, Finance, Engineering

Can also be external teams e.g. in a food manufacturing company you may use a tasting panel who sit outside of the organisation

Question 30

Tenders should be carried out in an ethical, responsible and transparent way that avoids any conflict of interest. What are the ways that best practice can be implements when arranging a tender?

Answer 30

Preparation- Ensure clear spec developed cross functionally with clear goals

Approach- justification for tendering

Timescales- How long will the process take?

Advertising- Where and how to advertise abiding by any regulation

Documentation- Any required docs that will be sent out

Consistency- all receive the same information and timelines

Submission- Must abide by a submit and receival deadline

Analysis- Criteria for analysis clear and in line with what was agreed at the prep stage

Decision- based on the criteria who is most suitable

Verification- Any final requirements like samples/ demos

Negotiation- can also be PTN- post tender negotiation which is after the most suitable supplier has been selected

Contract prep- Contract documentation drawn up

Contract award- signatures from both parties

Notification- comply with agreed processes

Feedback- unsuccessful suppliers are informed

Debrief- Internal discussion and review

Question 31

What is MEAT?

Answer 31

Most economically advantageous tender

Question 32

What are examples of assessment criteria for tendering?

Answer 32

Purpose of selection criteria is to evaluate which supplier meets the spec requirements and gives the best added value (or innovation opportunities)

Price
WLC
TCA
Supplier compatibility
Risk
ESG
Ethical compliance
Sustainability
Contract delivery

Question 33

What is a weighted points system?

Answer 33

Evaluation procedure that enables a fair comparison of set criteria. The weight of each criteria reflects its importance in the decision making process.

The total score for all weights usually adds to 100.

Question 34

What are examples of ESG assessment areas when looking for potential suppliers?

Answer 34

Have you encountered bribery? How did you deal with that
How do you prevent fraud?
Are your staff part of a trade union?
Do you employ migrant workers?
What practices do you employ when hiring staff?

These can be asked as part of a PQQ and generate pass/fail metrics in advance.

Question 35

What is added value and how can it be assessed?

Answer 35

Added value refers to non-cash releasing benefits that can be generated via the procurement process. e.g. supplier selection and SRM

It can also be defined as the features of a product/service that are of value to the buyer which they are prepared to pay extra for.

Examples:
Good quality
Short lead time
CSR/ESG policy
Environmental policy
Sustainability
Comms
Risk
Positive relationship
Good reputation
Positive brand awareness

Question 36

What is a business case?

Answer 36

Justification for proposed project/ action based on its investment and cost implications balanced against its benefits

Examples of things it could contain with reference to tendering:
Intro/exec summary
Process undertaken
Options
Benefits
Costs
Risks
Recommendation

Question 37

What is the CIPS code of conduct?

Answer 37

A document stating the standards, actions and behaviour that a CIPS member must conform to as part of their CIPS membership

During tendering it is important that the CIPS code of conduct is abided, whether it is competitive or not. Suppliers may ask for example, why they didnt win a tender and you need to be able to justify e.g. with openness on the scoring mechanism

Question 38

What could be signs that indicate financial instability of a supplier?

Answer 38

Reduced quality/ performance
Requests for sooner payments
High customer/staff churn
Change of bank
Rumours

Question 39

How can you assess financial stability?

Answer 39

Income/ profit and loss account

Balance sheet- a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time

Cash flow statement- incomings and outgoings over a financial period

However, figures are historic, economy can change over the course of a contract or supplier may have undergone operational change

Question 40

What are some examples of primary data?

Answer 40

New data specifically collected from the relevant source

Direct comms
Networking
Commissioned research
trade fairs

Question 41

What are some examples of secondary data?

Answer 41

Data that has been previously collected and used for a new purpose

Economic indices
Supplier websites
Financial journals
Magazines
Published surveys
Professional bodies
COmparison websites

Question 42

What contributes to a credit score?

Answer 42

Assessment on the risk level of working with another organisation. It is a weighted score of:

Payment history
Amount owed
Type of credit
Length of credit (ie. amount of time taken to pay off debts)