CIPS On-line Tutoring WebinarJuly 2015

Agenda

• Introduction

• Overview of D2 – Business Needs in P & S

• Study Tips and Exams

• Past D2 Exam Paper & Assessor Report

•Review of past exam questions

• Q&A

Business Needs inProcurement and Supply

Diploma in Procurement and Supply

Learning outcomes:

1. Understand how to devise a business case for requirements to be sourced from

external suppliers

2. Understand the fundamentals of specifications and key performance indicators

that are included in contractual arrangements made with suppliers

3. Understand the main clauses that are included in contracts

4. Understand the main implications of outsourced work or outsourced services for

procurement

What are business needs?• An organisation needs certain inputs in order to perform its

activities and pursue its objectives

• The planners of business activities, and the users of inputs, typically notify the procurement function of these requirements, in various ways

• The task of procurement is to fulfil the input requirements, by achieving what are often called the five rights of procurement

Operational objectives of procurement are to provide right inputs to meet operational needs on an organisation

But may also have strategic and commercial objectives - profit, competitive advantage, cost leadership, differentiation, learning

Type of purchase (1.1) – page 7• Straight re-buy of items already sourced from a supplier

• Modified re-buy, where some of the requirement has changed

• New buy, where the requirement has not previously been specified or sourced

Has implications for the extent to which systematic business case justification is required.

Must understand how business needs may influence procurement decisions for each of these types of purchase

The business case process – objectives of a

formal business case process (1.1)

• Fostering strategic, business-focused thinking

• Improving the efficiency and quality of decision-making

• Enabling management to evaluate proposals for feasibility, suitability and acceptability

• Enabling management to compare alternatives and options

• Establishing measurable yardsticks by which the subsequent performance, deliverables or outcomes of projects can be evaluated

• Is the project or asset achieving the business case benefits anticipated?

• Are the assumptions made in the business case turning out to be accurate?

• Is the business case justification for the project still valid?

Informal business case structure (low value & low risk)

Introduction/background

• Overview of the business need• Priority of the need or issue (eg using Kraljic analysis)• The current situation

Options • Options considered (if any), with reasons for rejecting or carrying forward each option

Business benefits • Expected outcomes of the proposed solution, and their associated business benefits

• Alignment of the proposed solution with business objectives, strategies, policies and values

Costs and risks • Estimated costs of the proposed solution• Anticipated risks of the proposed solution• Anticipated impacts on activities and relationships • Anticipated risks and costs of not pursuing the proposed solution (or doing

nothing)

Recommendation • Net (on-balance) cost/benefit assessment• Return on investment or payback period (if data is available)

KPIs (if data is available)

• Target costs and results which will be used to evaluate performance

Business benefits – that can be included in

business case (1.3)

• Fulfilment of a specific business objective

• Increased revenues

• Reduced costs

• Enhanced profitability

• Enhanced value for money

• Enhanced shareholder value

• Competitive advantage

• Leverage of key resources

• Increased capacity, capability or flexibility

• Improved brand or reputational equity

BUSINESS OBJECTIVES PURCHASING OBJECTIVES

Maintain or increase market share Provide supplies to match customer needs; assure

quality; reduce delivery lead time; reduce cost

Improve profits, cashflow, and return on capital Reduce stocks; improve reliability; more frequent

deliveries

Shorten time to market Early supplier involvement

Eliminate non-core activities Develop effective make-or-buy policy; integrate

purchasing and capacity planning

Introduce continuous improvement Reduce supplier base; partnership approaches;

reduce product complexity; increase accuracy and

reliability

Become world class supplier Work with suppliers to establish world class

standards; improve flexibility of response to market

conditions; liaison with technological sources

Links between corporate and purchasing objectives (1.3)

• Communication with suppliers

• The buyer’s database of market data

• The marketing communications of suppliers

• Online market exchanges, auction sites and forums

• Advisory and information services

• Trade fairs, exhibitions and conferences

• Informal networking and information exchange

Primary sources of market data on costs and prices (1.2)

Components of the cost base

• Raw materials (and/or components, subassemblies

and consumables)

• Labour

• Overheads

Benefits and limitations of WLCBenefits

• Enabling the fair (like-with-like)

comparison of competing options

• Enabling realistic budgeting over

the life of the asset

• Highlighting, at an early stage, risks

associated with the purchase

• Promoting cross-functional

communication on cost and asset

management issues, and improving

awareness of total costs

• Supporting the optimisation of

value for money

Limitations

• It is not an exact science, and

future cost estimates are subjective

• Many costs are incurred through

the life of a product or asset, and

not all of these will be easy to

forecast

• A wide range of intervening factors

may affect costs over the lifecycle

of a product or asset

• A systematic WLC exercise can be

time-consuming, labour-intensive

and costly

Objectives of preparing a budget (1.4)

• To express organisational objectives as operational targets

• To communicate plans and targets to stakeholders

• To motivate people to attain performance and cost targets

• To motivate managers to identify risks and problems

• To measure unit or project performance

• To help evaluate managerial performance

• To pre-authorise estimated levels of expenditure for procurement activities

• To co-ordinate operations

• To control procurement activities and costs

The role of a specification (2.1)

• To define the requirement

• To communicate the requirement

• To provide a means of evaluating the quality or

conformance of the goods or services supplied

Types of specification (2.1)Conformance specification

The buyer details exactly what the required product, part or material must consist of. This may take the form of an engineering drawing or blueprint, a chemical formula or ‘recipe’ of ingredients, or a sample of the product to be duplicated, for example. The supplier may not know in detail, or even at all, what function the product will play in the buyer’s operations. The supplier’s task is simply to conform to the descriptionprovided by the buyer.

Performance specification

The buyer describes: what it expects a part or material to be able to achieve, in terms of the functions it will perform and the level of performance it should reach; or what outputs or outcomes (results) it expects to be delivered by a service. It is up to the supplier to furnish a product or service which will satisfy these requirements: the buyer specifies the ‘ends’, and the supplier has relative flexibility as to ‘means’ of achieving those ends.

Developing specifications - Content (2.2)

ITEM CONTENT

Identification Title, reference number, authority, designation, issue number and date

Circulation Distribution list of the specification

Contents List of parts, clauses, illustrations and annexes

Foreword Reasons for writing the specification

Introduction Summary of the business need and technical aspects of objectives

Scope Range of objectives and content

Definitions Terms used with special meanings in the text

Main body of the

specification

Requirements, guidance and methods

Annexes Additional detailed technical information and examples

Index Alphabetical index

Bibliography Details of internal and external standards and publications referred to in the

specification

Drafting specificationsFeatures of an effective specification:

• Clear and unambiguous as to what is required

• Concise

• Comprehensive

• Compliant with all relevant standards, and health, safety and environmental laws and regulations

• Up-to-date

• Expressed in terms which can be understood by all key stakeholders

• Value-analysed

Environmental criteria in specification

might include (2.2):

• Location in relation to the buyer and lower tiers of supply

• The use of less, and ‘greener’, materials and packaging

• ‘Green’ design and innovation capability; reverse logistics

and recycling capability; and so on

• The development and enforcement of strong

environmental policies

• Robust environmental management systems

• Compliance with environmental protection and emissions

law and regulation in the country of operation

• The development of robust CSR policies and ethical codes

• Location in relation to the buyer

• Evidence of responsible and ethical labour policies and practices

• Evidence of, and commitment to, conformance to relevant legislation and regulations

• Compliance with International Labour Organisation standards

• Evidence of ethical trading policies and practices

• Compliance with Fair Trade standards, or membership of the Ethical Trading Initiative

• Commitment to transparency and improvement, in collaboration with the buyer

CSR and social sustainability criteria for specification may include (2.2)

Defining KPI’ -What is performance measurement?

Supplier performance measurement is the assessment and

comparison of a supplier’s current performance against:

• Defined performance criteria

• Previous performance

• The performance of other comparable organisations (eg other

suppliers) or standard benchmarks

QUANTITATIVE MEASURES QUALITATIVE MEASURES

Easier to establish KPIs KPIs likely to be subjective

Easier to monitor over time Monitoring over time is subjective

Focus on efficiency Focus on effectiveness

Particularly suitable for purchase of

products

Particularly suitable for purchase of

services

Examples include prices, delivery

performance, financial performance,

reject rates

Examples include management

capability, staff issues, technological

development, willingness to

collaborate closely

Quantitative and qualitative measures: characteristics (1.3)

Four types of benchmarking: (1.3)

• Internal benchmarking

• Competitor benchmarking

• Functional benchmarking

• Generic benchmarking

The benchmarking process

PERFORMANCE

CRITERION

PERFORMANCE INDICATOR

Quality Management systems and processes are clear and

documented

Cost management Consumable purchasing rates are benchmarked for value

for money

Timeliness Service is delivered within the agreed periods of availability

Quantity Stocks are maintained to appropriate levels to ensure

continuity of service

Compliance Corporate policies and procedures are adhered to

Typical KPI’s - KPIs as statements of

performance

Benefits of effective SLAs (2.3)• The clear identification of customers and providers, in relation to specific services

• The focusing of attention on what services actually involve and achieve

• Identification of the real service requirements of the customer, and potential for

costs to be reduced by cutting services or levels of service that (a) are

unnecessary and (b) do not add value

• Better customer awareness of what services they receive, what they are entitled

to expect, and what additional services or levels of service a provider can offer

• Better customer awareness of what a service or level of service costs, for realistic

cost-benefit evaluation

• Support for the ongoing monitoring and periodic review of services and service

levels

• Support for problem solving and improvement planning

• The fostering of better understanding and trust between providers and customers

What is a contract? (3.1)A contract is basically a statement of:

• Exactly what two or more parties have agreed to do or

exchange

• Conditions and contingencies which may alter the

arrangement

• The rights of each party if the other fails to do what it has

agreed to do

• How responsibility or ‘liability’ will be apportioned in the

event of problems

• How any disputes will be resolved

General contract structure (3.1)The agreement Names and signatures of the parties to the contract

Definitions Definition of names and terms, to avoid repetition of long sentences in the body of the contract.

General terms • General agreements clause• Changes, alterations and variations clause• Notice clause: how and by what method any notice relating to the

contract is to be sent

Commercial provisions

Rights and obligations of the supplier and of the purchaser. Standard terms of purchase, for example, might include:•Passing of title/ownership•Time of performance•Inspection/testing•Delivery/packing•Assignment•Liability for damage or loss in transit•Rejection•Payment terms

General contract structure (cont.)Secondary commercial provisions

• Confidentiality and intellectual property protection (where relevant)• Indemnity• Guarantee clause• Termination• Arbitration

Standard clauses These may include:•Waiver•Force majeure•Law and jurisdiction

ADVANTAGES DISADVANTAGES

Helps reduce time and costs of

contract development

Terms may not be as advantageous to

a powerful buyer as if contract was

negotiated

Avoids ‘reinventing the wheel’ Terms may not include special clauses

Industry model forms are widely

accepted

Legal advice is still required if

significant amendments or variations

are to be made

Designed to be fair to both parties Costs of training buyers to use model

forms

Advantages and disadvantages of model form contracts

Interpreting key terms (3.2)

• What type of clause they are and what they are

designed to achieve

• The legal and operational effects or implications of

the clause for the buyer and the supplier

• Whether the example clause, as given, expresses the

buyer’s requirements (and best interests) clearly

A breach of contract occurs:

• When a party fails to perform an obligation under the

contract: is in breach of a condition; improperly

repudiates (ends) the contract; or prevents completion of

the contract on his own side or by the other party, during

performance. These are examples of ‘actual breach’.

• When, before the time fixed to perform an obligation, a

party expressly or by implication repudiates the

obligations imposed on him by the contract: ie shows an

intention not to perform. This is called ‘anticipatory

breach’.

Insurances (3.2)

• Employer’s liability insurance

• Public liability insurance

• Professional indemnity insurance

• Product liability insurance

What is the ‘right price’? (3.3)

• A price which ‘the market will bear’

• A price which allows the seller to win business, in competition

with other suppliers

• A price which allows the seller at least to cover its costs, and

ideally to make a healthy profit

The ‘right price’ for the supplier or seller to charge(the sales price) will be:

What is the ‘right price’?

• A price which the purchaser can afford

• A price which appears fair and reasonable, or represents value

for money, for the total package of benefits being purchased

• A price which gives the purchaser a cost or quality advantage

• A price which reflects sound purchasing practices

The ‘right price’ for the buyer to pay(the purchasing price) will be:

Reasons for cost/price variations• Under-estimation of costs at the forecasting stage

• Price inflation, escalating materials costs

• Wage inflation, escalating labour costs

• Commodity and energy price fluctuations

• Exchange rate fluctuations

• Overtime or incentive payments required to ‘crash’ the schedule

• Failure costs incurred by unforeseen quality problems

• Changes in the scope of the contract

• Unforeseen contingencies

Cost-plus pricing

• A cost plus fixed fee (CPFF) contract includes payment of allowed costs plus a pre-determined fixed amount, as the fee for doing the work

• A cost plus incentive fee (CPIF) contract includes payment of allowed costs plus a higher fee for meeting or exceeding performance or cost targets or KPIs

• A cost plus award fee (CPAF) contract includes payment of allowed costs plus a fee (bonus) based on the contractor’s performance

Payment methods/terms (3.3)

• Payment in advance (or payment with order)

• Payment on delivery

• Open account or credit

FACTORS SUPPORTING MAKING/DOING FACTORS SUPPORTING BUYING IN

Opportunity to extract value from otherwise idle capacity and resources

Quantities required are too small for economic production

Potential for lead time reduction Avoid costs of specialist machinery and labour

Cost of work is known in advance Reduced inventory costs

Desire to exert direct control over production and/or quality

Financial risk shared with supply chain

Protection of confidentiality and intellectual property

Access to contractor’s specialist research, expertise, technology, patents, designs and so on

Less supply risk and supplier risk Augmented production capacity

Desire to maintain a stable workforce Desire to maintain a stable workforce

Factors in make/do or buy decisions (4.1)

Drivers for outsourcing

• Quality drivers

• Cost drivers

• Business focus drivers

• Financial drivers

• Relationship drivers

• Human resource drivers

Why does it go wrong (risks)?• The organisation fails to distinguish correctly between core and

non-core activities

• The organisation fails to identify and select a suitable supplier

• The organisation has unrealistic expectations of the outsource provider

• The outsourcing contract contains inadequate or inappropriate terms and conditions

• The contract does not contain well defined key performance indicators or service levels

• The organisation lacks management skills to control supplier performance and relationships

• The organisation gradually surrenders control of performance to the contractor

Advantages of internal supply

• The transaction costs are low

• The relationship between ‘customer’ and ‘supplier’ is

likely to be long-term and stable

• There is (usually) no profit motive within the internal

supplier

• Customer and supplier are part of the same

organisation, meaning that they should share the

same culture and values

CIRCUMSTANCES WHAT ACTIVITIES TO OUTSOURCE

Procurement (or ‘purchasing’) is a peripheral

rather than a core activity (low or generalised

skill requirements, internally focused

responsibilities, well-defined or limited tasks,

jobs that are easily separated from other tasks)

• Purchase orders

• Locally and nationally procured needs

• Low-value acquisitions

• Brand name requirements

• Call-offs against framework agreements

• Administration and paperwork associated

with purchasing needs

The supply base is small and based on proven

cooperation, and there are no supply

restrictions

• Well-defined or limited tasks

• Jobs that are easily separated from other

tasks

• Jobs that have no supply restrictions

The supplier base is small, providing non-

strategic, non-critical, low-risk items

• Outsource purchasing to specialist purchasing

and supplier organisations, or to buying

consortia

When procurement should be outsourced

The business case for outsourcing (4.2)

• Costs and benefits

• Evaluation of options

• Alignment with organisational needs and timescales

The main criteria for making a business case for any procurement proposal are:

• The outsourcer may be unable to keep up with the

pace of technological change in a particular activity

• The outsourcer may simply lack capability or capacity

to perform the activity competitively

• The outsourcer may be able to transfer the resources

used to make/do to another activity which will save

cost or increase revenue

Operational arguments for outsourcing

The outsource procurement process (4.3)

The outsource procurement process

Contract provisions - transfer of assetsContract terms should clearly establish:

• The value (or valuation) of assets transferred to the outsource provider, and how depreciation or appreciation in value will be dealt with

• Arrangements for the return to the outsourcer, or other disposal, of assets transferred to the outsource provider, upon termination of contract

• Arrangements for the return of files, data and proprietary information to the outsourcer, upon termination of contract

• Ownership of assets developed or created in performance of the contract

• Responsibilities for insurance, maintenance and management of the assets

Performance management clauses

• A rights of inspection clause

• A schedule performance clause

• Penalties for specific non-performance, and

incentives for performance or improvements

Risks of contractor switching

The new supplier may fail to perform

Process incompatibility

Cultural or inter-personal incompatibility

Loss of knowledge

Learning curve: time for the new provider to achieve peak performance,

teething problems

Exposure of intellectual property, confidential data

Problems of adversarial hand-over from the old provider to the new

De-stabilisation of the workforce, through multiple transfers of service

provision

Study Tips & Exam Preparation

Study Tips

Time management

Support

Resources

Attitude

Balance

Assignments/ learning outcomes

Exam success

Types of Questions

• Essay style

•Unseen case studies

•Pre-released case studies

Command Words

•Analyse

•Appraise

•Argue

•Assess

•Comment on

•Compare

•Contrast

•Criticise

•Define

•Describe

• Discuss

• Enumerate

• Evaluate

• Explain

• Identify

• Illustrate

• Interpret

• Justify

• List

• Outline

• Propose

• Reconcile

• Relate

• Review

• Show

• State

• Suggest

• Summarise

KEY - D: AD: PD

Exam Paper Revision – D2 Business Needs in Procurement and Supply Focus on command word, instruction, mark allocation

and assessor comments.

July 2014 – D2

Q1 (a) When operating financial budgets explain the difference between an incremental

budget and a zero-based budget. (6 marks)

The major difference between the two methods is the incremental budget method adjusts

the previous period with known changes to arrive at a budget whereas a zero based

budget ignores the previous period and starts completely from scratch.

Incremental budget example – add a percentage to last period’s costs to reflect average

cost rises or pricing trends.

Zero based budget example – estimate costs and prices for procurements planned in new

period.

Q1(a) When operating financial budgets explain the difference

between an incremental budget and a zero-based budget. (6

marks)

•Required an explanation of the difference between an incremental budget and

a zero-based budget.

• A few responses did not clearly explain the difference, and/or included

various inaccurate guesses;

•Vast majority of answers were of a very high standard for this part of this

question.

D2 July 2014 - Assessor Report

July 2014 – D2

Q1 (b) Describe THREE cash outflows that might be entered in a procurement function’s

cash budget. (9 marks)

1. Payments to external suppliers for inputs required to produce the organisations goods

or services. Example – payment for raw materials

2. Payments to creditors for the purchase of plant and other productive assets required to

produce stock for sales. Example – payment for production machinery

3. Payments of salaries, wages and benefits for staff as reward for working in the

business. Example – payment to direct and indirect staff including benefits.

Q1(b) Describe THREE cash outflows that might be entered in a procurement function’s cash budget.

(9 marks )

•Answers should have given a brief identification and a description of any three cash

outflows

•Markers accepted answers that regarded the purchasing procurement budget as

applying to the whole organisation, and also those that regarded the purchasing

procurement budget as applying solely to the purchasing function itself.

•Generally, this part of this question was also answered well.

•Most responses gained between four and seven marks.

•Despite the very broad range of ‘cash outflows’ that was accepted by markers, some

responses still struggled to give sufficiently clear and comprehensive information to fully

address this part of the question.

D2 July 2014 - Assessor Report

July 2014 – D2Q1 (c) The procurement function of a shirt manufacturing company forecasted that the cost of

the imported material needed would be $4-00 per shirt. After the first three months of

production it was established that the actual cost was $3-50 per shirt.

Suggest FIVE possible reasons for the variance where the actual material cost is lower than the

forecasted cost. (10 marks)

1. The skill of the buyer’s negotiating team to negotiate lower prices by using negotiating

techniques such as conditioning, threat of competition or cost analysis

2. The strength of the buyer’s bargaining position to leverage the supplier to offer a better

than market price because they represent a large portion of the suppliers business.

3. Changes in supply and demand conditions resulting in excess supply and suppliers offering

lower prices to move stock or gain market share.

4. Exchange rate fluctuations where the $ strengthened against the foreign currency of the

supplier country.

5. Quantity discounts negotiated due to an increase in quantity purchased and supplier is

prepared to reduce price as fixed costs are already recovered on standard quantity.

Q1 (c) The procurement function of a shirt manufacturing company

forecasted that the cost of the imported material needed would be $4-00 per

shirt. After the first three months of production it was established that the

actual cost was $3-50 per shirt. Suggest FIVE possible reasons for the variance

where the actual material cost is lower than the forecasted cost. (10 marks)

•All feasible and relevant responses were accepted by markers.

•Up to two marks were awarded for each relevant ‘reason’ suggested, with one

mark for identification and the second mark for its description.

•A few responses went into unnecessary introductory and unrelated detail;

•Few responses gave more than five ‘reasons’, which was not wrong but which

could not gain any marks, as markers do not assess ‘extra’ content of this kind.

D2 July 2014 - Assessor Report

July 2014 – D2

Q2 (a) Explain the reasons for using standards within specifications. (9 marks)

1. They are clear and there is no uncertainty or ambiguity as to the requirement meaning

less potential for error or disputes with supplier

2. Save time and cost in preparing company specifications as standard are available off

the shelf

3. Reduces design time so can go to market quicker

4. Increases the range of potential suppliers as standard is generic and not confined to 1

specific product or brand

5. Allows accurate comparison of quotations as all suppliers will quote on same

specification

Q2 (a) Explain the reasons for using standards within specifications. (9

marks)

•All feasible and relevant reasons, were accepted, and were awarded marks;

•Higher marks being awarded for more reasons and/or for more detailed

descriptions of those reasons.

•Some responses gave too much unnecessary detail about ‘conformance’

specifications and ‘performance’ specifications; or only gave generic

information about specifications, without addressing ‘standards’.

D2 July 2014 - Assessor Report

July 2014 – D2

Q2 (b) Describe FOUR typical key performance indicators (KPIs) and outline how

they might be used to measure performance in a contract. (16 marks)

KPIs described were delivery, lead times, quality, prices, risk management, flexibility,

responsiveness, technical support, compliance, environmental impacts, and accuracy and

timeliness of invoicing and other administrative and financial procedures. All of these, and

all other feasible KPIs, were accepted, and were awarded marks. Up to four marks were

awarded for each KPI described

Q2(b) Describe FOUR typical key performance indicators (KPIs) and outline

how they might be used to measure performance in a contract. (16 marks)

•Up to four marks were awarded for each KPI described, with higher marks

being awarded for the more detailed descriptions.

•There were a few weaker answers, that were too short, or that lacked detailed

description.

•Good responses fully described four relevant KPIs; sometimes supplemented

with examples from candidates’ own knowledge and experience.

D2 July 2014 - Assessor Report

July 2014 – D2Q3 (a) Explain the following types of pricing arrangement and their use:

(i) Cost plus fixed fee. (5 marks)

(ii) Cost plus incentive fee. (5 marks)

(iii) Cost plus award fee. (5 marks)

(i) Cost plus fixed fee: costs are covered in full; and the extra fixed fee is based on a pre-determined fixed amount on

successful completion of the contract. The costs are unknown, although they can be capped; but the fixed fee

remains constant. This pricing arrangement may be used in particular where the supplier's costs cannot easily be

estimated e.g. for some Research and Development contracts; but there is no incentive on the supplier to reduce

their costs with this arrangement, which may make it less attractive to the buyer.

(ii) Cost plus incentive fee: costs are covered as for ‘fixed fee’; but then an additional incentive fee is offered if the

supplier should meet or exceed predetermined KPIs, perhaps especially those aimed at making cost reductions or

achieving high measurable performance levels. Both parties may then share the cost savings. This pricing

arrangement may be used particularly where there is plenty of scope for cost reductions and performance

improvements by the supplier.

(iii) Cost plus award fee: costs are covered as for ‘fixed fee’; but then an additional incentive award fee is offered if

the supplier should meet, or exceed, some predetermined aspects of contractual performance that are not easy to

measure quantitatively. The award fee may be paid to the supplier in recognition of qualitative assessment of the

supplier's application of effort to meet the buyer’s needs, probably on a subjective evaluation. This pricing

arrangement may be used particularly for service contracts, such as cleaning, catering, software development, etc.;

where the contractor’s performance in qualitatively satisfying the demands of internal customers may be the driver

for the amount of the award fee.

Q3(a) Explain the following types of pricing arrangement and their use:

(i) Cost plus fixed fee. (5 marks)

(ii) Cost plus incentive fee. (5 marks)

(iii) Cost plus award fee. (5 marks)

•Good responses fully explained each of the listed three types of pricing arrangement, and the use of each

one

•Very few satisfactory responses, and the large majority of responses did not clearly explain the three

pricing arrangements. Most gave only very basic descriptions of the three types, often with many errors

and inaccuracies

•Only a very few responses really explained the arrangements, or gave clear explanations and examples of

their use.

•Many responses were little more than a sentence or so in length, frequently just repeating the question.

Several responses made mention of NASA as a user of ‘cost plus award fee’ arrangements, but often

without any further explanation or justification. This fee in particular was rarely explained correctly. A

wide allowance was made here by markers for differences in terminology used in responses, because the

terminology of pricing arrangements is not consistent across the world, or even across different sectors in

the UK. Nonetheless, a significant number of answers were off the track of the question, and/or were of

insufficient length and depth to gain high marks.

D2 July 2014 - Assessor Report

July 2014 – D2

Q3 (b) Explain what is meant by an indemnity clause and provide an example of how such a

clause may be used. (10 marks)

An indemnity clause is designed to secure an undertaking from the other party that it will

accept liability for any loss arising from events in performance of the contract, and will

make good the loss to the injured party or parties

General indemnity clauses, can cover a variety of situations, such as indemnity against all

loss of, or damage to, any of the buyer’s property arising from acts of the supplier or its

sub-contractors; or clauses which give indemnity to any claims a buyer might face from its

employees or its customers as a result of the supplier’s actions.

Q3(b) Explain what is meant by an indemnity clause and provide an example of how

such a clause may be used. (10 marks)

•The command word in the question is, very clearly, ‘explain’; and the topic to be

explained is, very clearly, an indemnity clause

•Candidates are also required to provide an example of how an indemnity clause may

be used

•Most responses seemed to miss the point of the question entirely, and explained

other, unrelated, types of contractual clause, such as Liquidated Damages clauses, Force

Majeure clauses, or Insurance clauses

•All relevant examples of indemnity were given credit by markers; but scores for this

part of this question were frequently very low

•This appeared to be the lowest-scoring question from this exam session

D2 July 2014 - Assessor Report

July 2014 – D2Q4 Explain FIVE factors that a manufacturing company will take into account when deciding whether to make a component itself or whether to buy it from a supplier. (25 marks)

1. Whether the component is strategically important or core to the business. If the component is core or strategic to due risk and potential profit impact then there may be risks to outsourcing due to loss of IP, and loss of control over quality and reliability of supply. If component is of poor quality or supplied late, then market share will be lost. If not core or strategic, then outsourcing may be viable as it will allow the business to focus on more important components.

2. The costs of producing in-house are higher than buying from a supplier. If costs from a supplier are lower, then it could make sense to outsource as the supplier is most probably more efficient. Lower prices will allow the company to put more into marketing or reduce prices to gain market share. If the company continues to manufacture a uncompetitive component they could loose market share.

3. The availability of competencies in-house and in the outside marketplace etc...

4. The available capacity in-house and in the outside marketplace etc...

5. The risks involved in devolving production activities to the external supply chain, such as risks to confidential information and to intellectual property; and the effects on the workforce, such as the possibility of redundancies etc...

Q4 Explain FIVE factors that a manufacturing company will take into account

when deciding whether to make a component itself or whether to buy it from

a supplier (25 marks).

•This question was answered very well by the great majority of candidates

•Responses often included good discussions of market issues, and issues

around availability of competent suppliers

•There were some exceptionally good responses to this question, which fully

debated the issues involved, and which included well-thought-out examples

•All valid responses were awarded marks, with up to five marks awarded for

each ‘factor’

•A few responses gave fewer than five factors, and a few gave more than five

factors

D2 July 2014 - Assessor Report

Past Exam QuestionsMay 2015 Mar 2015 Nov 2014 July 2014

Q1 (a) Using an

example to

illustrate, explain

the term ‘budget’. (5

marks)

(b) Describe TWO

approaches to

budgeting used to

establish

procurement

targets. (8 marks)

(c) Explain THREE

purposes of

preparing a budget

for a procurement

function. (12 marks)

Q1 (a) Define the

term ‘total

lifecycle costing’.

(5 marks)

(b) Describe FIVE

costs that should

be considered

when calculating

the lifecycle cost

of an item, apart

from the

purchase price

of the item. (20

marks)

Q1 (a) Explain the

difference between

the terms ‘cost’

and ‘price’. (5

marks)

(b) Describe FIVE

sources of data

that a buyer might

consult to obtain

information about

the market prices

of inputs. (20

marks)

Q1 (a) When operating financial

budgets explain the difference between

an incremental budget and a zero-

based budget. (6 marks)

(b) Describe THREE cash outflows that

might be entered in a procurement

function’s cash budget. (9 marks)

(c) The procurement function of a shirt

manufacturing company forecasted that

the cost of the imported material

needed would be $4-00 per shirt. After

the first three months of production it

was established that the actual cost

was $3-50 per shirt.

Suggest FIVE possible reasons for the

variance where the actual material cost

is lower than the forecasted cost. (10

marks)

Past Exam QuestionsMay 2015 Mar 2015 Nov 2014 July 2014

Q2 (a) Outline FIVE

social or

environmental

criteria which could

be included in a

specification. (10

marks)

(b) Describe FIVE

typical sections,

other than social or

environmental, that

should be included in

a specification. (15

marks

Q2 (a) Outline FIVE

characteristics of an

effective

specification. (10

marks)

(b) Explain THREE

reasons in favour of

the purchasing

function becoming

involved in the

drafting of a

specification. (15

marks)

Q2 (a) Explain THREE

advantages of using

Key Performance

Indicators (KPIs) in a

contract. (15 marks)

(b) Explain TWO

potential information

security risks that

should be addressed

in the specification

for a new computer

system. (10 marks)

Q2 (a) Explain the

reasons for using

standards within

specifications. (9

marks)

(b) Describe FOUR

typical key

performance

indicators (KPIs) and

outline how they

might be used to

measure

performance in a

contract. (16 marks)

Past Exam QuestionsMay 2015 Mar 2015 Nov 2014 July 2014

Q3 (a) Explain TWO

reasons why a ‘fixed

price’ contractual

arrangement might not

be acceptable to a

supplier. (10 marks)

(b) Explain THREE

advantages of using

bespoke (contract

specific) terms in a

contract, rather than

using standard terms

and conditions or

model form contracts.

(15 marks)

Q3 Explain the

purposes of the

following clauses in

contracts:

(a) Indemnities. (5

marks)

(b) Sub-contracting.

(5 marks)

(c) Insurances. (5

marks)

(d) Guarantees. (5

marks)

(e) Liquidated

Damages. (5 marks

Q3 (a) Describe, with an

example, the following price

arrangements in commercial

agreements:

(i) Fixed price arrangements

(ii) Incentive price

arrangements

(iii) Cost-plus arrangements. (9

marks)

(b) Explain TWO advantages of

fixed price purchase

arrangements for a purchasing

organisation. (8 marks)

(c) Explain TWO elements that

may cause price fluctuations in

a cost plus purchase

arrangement. (8 marks)

Q3 (a) Explain the

following types of

pricing arrangement and

their use:

(i) Cost plus fixed fee. (5

marks)

(ii) Cost plus incentive

fee. (5 marks)

(iii) Cost plus award fee.

(5 marks)

(b) Explain what is

meant by an indemnity

clause and provide an

example of how such a

clause may be used. (10

marks)

Past Exam QuestionsMay 2015 Mar 2015 Nov 2014 July 2014

Q4 Explain FIVE

factors that a

manufacturing

company will take

into account when

deciding whether to

make a component

itself or whether to

buy it from a

supplier. (25 marks)

Q4 (a) Describe FOUR

factors that have

contributed to the

growth of

outsourcing. (16

marks)

(b) Explain THREE

reasons why

outsourcing projects

may fail to achieve

their expected

benefits. (9 marks)

Q4 (a) Explain the

meaning of the term

‘make/do or buy

decision’ for goods or

services. (5 marks)

(b) Describe FIVE

factors that an

organisation may

take into account

when making a

‘make/do or buy

decision’ for goods or

services. (20 marks)

Explain FIVE factors

that a manufacturing

company will take

into account when

deciding whether to

make a component

itself or whether to

buy it from a

supplier. (25 marks)

Questions