CIPS L4M1 - Question & Answer Past exam questions

O1. Explain FIVE differences between operational expenditure and capital expenditure.`

Capital expenditure items are charged to a capital account, whereas operational expenditure is charged to a profit and loss account Capital items are procured for a long period of time and have a lifespan of many years. Operational items are procured for short term consumption Capital items tend to be high value assets, whereas operational items tend to be comparatively inexpensive The procurement of capital items involves complex requirements and decisions about expenditure are likely to involve a wide range of stakeholders. Operational expenditure is usually less complex and often involves repeat spends Preparation work on capital expenditure is likely to be lengthy and will involve building a business case, investment appraisal and the option to buy or lease. Operational expenditure tends to be more straight forward and budgets are pre-set for regular demand Capital procurement is less frequent than the procurement of operational items, which is usually on a regular basis

O3. A manufacturer of electrically powered tools for the engineering industry consists of four separate business units, each of which undertakes its own purchasing activities. Discuss THREE benefits of centralising all purchasing activities with those of retaining the present decentralised structure. (1 of 2)

Centralisation' and 'decentralisation' refer to the degree to which responsibility and authority is delegated. Arguments for centralisation can only be evaluated in the context of specific organisational environment and might include: 1. Policies & procedures 2. Consolidation of requirements 3. Location 4. Supply market structure 5. Expertise required: 6. Customer demands

O2. Outline THREE benefits that may result from the use of electronic systems in the sourcing process

Cost savings, through streamlining and speeding up processes; examples include data input and transfer and calculating Improved communication and transparency of information throughout the internal and external supply chain, to support decision making Greater accuracy of data input, manipulation and transfer Reduced cycle and lead times, through streamlining procurement processes and more accurate data for demand forecasting

O2. Describe FOUR types of electronic system that can be used in the sourcing process.

E-catalogues: suppliers exhibit their products in these and they can be viewed online or downloaded Supplier portals and market exchanges: sites where multiple buyers and sellers share information about requirements and offerings E-tendering: using e-RFQ's and specifications posted online or e-mailed to potential suppliers. Bids can then be received and evaluated electronically E-auctions: these are conducted online using the buyer's or seller's website or a third party auction site Online supplier evaluation data, including third party reports and customer feedback

O3. Explain the following IT systems used by the procurement or supply chain function: (i) 'Enterprise Resource Planning' (ii) 'Materials Requirement Planning' (iii) 'Purchase to Pay (P2P)'.

ERP is a single data base to manage a wide range of functions and resources across a business. It offers real time solutions. MRP is a set of records, decision rules and procedures to manage demand. P2P is a two way flow of transactions taking a purchase requisition through to payment of invoice.

O3. Explain the term 'Enterprise Resource Planning'.

Enterprise Resource Planning system consolidates materials, manufacturing, logistics, supply chain, sales and marketing, finance and human resources into a single integrated management system. It is a single database able to offer real time information for solving a range of business problems and it is a computer based system designed to process an organisation's transactions. It also facilitates integrated and real time planning, production and customer response. Examples of ERP systems are SAP and Oracle.

O4. factors that impact on purchasing activities in the retail sector.

Factors might include the product mix, bottom line thinking, broad assortment of suppliers and stock lines, use of supplier specifications, supplier choice limited by brand, short feedback loop. There is a marketing element to buyers role and seasonal issues and fashion trends must be accounted for. Perishability is a factor to consider in food retail for example

O2. Outline THREE pre-contract award stages of the sourcing process.

Identification of the need, which may be via a requisition or Bill of Materials Description of the need through a specification, which might be performance or conformance Develop the contract terms, which set out what each of the two parties have agreed to do Source the market, identifying suppliers who might have the potential to supply the requirement Appraise suppliers, establishing whether they have the ability to fulfil the requirement Issue an invitation for bids, through a tender or quotation Analyse bids and select the most appropriate supplier Award the contract and issue the relevant contract documentation

O1. Outline FIVE ways in which improving the quality of a product can add value for an organisation.

Improved quality can add value by reducing the need for appraisal and prevention activities, which will save time and money. Improved quality will mean that the risk of failure is reduced. This should lead to a reduction in losses incurred due to poor quality products reaching the consumer. Improved quality will result in fewer goods being rejected or having to be re-worked, which will reduce costs for the organisation. Improved quality should improve brand image, resulting in more customers, increased revenue and profits, which have the effect of adding value. Similarly, if an improvement in the quality of the product has improved the brand image, customers are more likely to be loyal, resulting again in higher revenue and profits. Improved quality should mean that quality control measures can be reduced, thereby saving costs

O2. Explain THREE reasons why clearly defining needs adds value in the sourcing process

It encourages all relevant stakeholders to consider what they really need and whether this is the most cost-effective solution It communicates the requirement clearly to the supplier, so that they can plan to conform It minimises risk and costs associated with ambiguity or misunderstanding It provides a means of evaluating the conformance of the goods or services supplied It supports standardisation and consistency, where items are sourced from more than one supplier.

O3. Explain FOUR advantages for an organisation of following a structured sourcing process.

It ensures that all tasks that need to be performed have been performed and that there are no 'gaps', or things that have been forgotten It ensures co-ordination of effort between the parties collaborating in the process and that there has been no duplication of efforts It helps to promote consistency in the process and outcomes, as opposed to the uncertainty of doing things ad-hoc It prevents conflict and sub-optimal behaviour, where participants pursue their own interests and objectives It supports good governance and managerial control by ensuring that adequate checks and controls are in place It supports compliance with relevant laws, regulations and standards

O4. Describe FIVE ways in which the charitable status of a third sector organisation impacts on its procurement function.

It will set out the need for cost-effective and efficient use of the organisation's resources Procurement is accountable to the members, trustees and the regulator There will be a need for transparent accounting Procurement must always act in alignment with the values and culture of the organisation If the organisation has a retail arm, procurement must try to source quality goods that appeal to customers, but which can be sold at a reasonable price Procurement may face logistical challenges if there are overseas activities, such as aid work in disaster areas There will be a need for probity in all financial transactions

O3. Describe FOUR of the main functions of an IT based inventory management system.

Managing demand - ensuring that supplies are available in the right quantities and at the right time to satisfy the needs of internal and external customers Forecasting demand - to avoid overstocking or stock outs Controlling stock levels, in terms of quantity and value and to monitor and maintain minimum and maximum stock levels Ensuring that supplies are replenished in accordance with procurement policies; this includes triggering automatic replenishment requisitions at pre-established order points Capturing goods inwards information accurately and integrating this information with stock balance, contract management and payment systems Controlling the receipt, inspection, storage and issuing of supplies to users

O3. xplain FOUR reasons why it is important to maintain effective governance standards within the procurement function.

Procurement professionals potentially control large sums of money and they are in a position of trust within the organisation; they have a duty of care, which may be jeopardised by unethical conduct • Procurement professionals are faced by the opportunity to commit financial fraud or to misuse systems or information for personal gain • The decisions of procurement professionals typically benefit some suppliers over others. This creates an incentive for suppliers to try to influence decisions, through bribery • Procurement professionals are in a 'stewardship' role, responsible for finance and assets, which are owned by other people. Unethical conduct may be represented by the theft, loss or damage of assets, belonging to the owners of the organisation • The reputation of the profession and the employing organisation may be damaged by fraud or unethical conduct and enhanced by ethical conduct. Ethical standards are therefore an important element in managing reputational risk • Supply chain relationships may be damaged by unethical conduct. Ethical practices are therefore an important element in procurement professionals maintaining a good status with suppliers

O4. Compare a private sector organisation with a public sector organisation in the following THREE areas: (i) Legal and regulatory requirements (ii) Organisational objectives (iii) Importance of corporate social responsibility

Public sector organisations are regulated to protect national interests and institutionalised standards. A key distinction is that the public sector has to follow strict tendering rules, such as EU procurement directives. Answers to section (ii) gave examples of private sector objectives as maximising profits, increasing market share and providing a return to shareholders. The public sector, on the other hand is to provide public services and to fulfil economic and social goals. In the case of section (iii), the difference between these two sectors is becoming increasingly less. The public sector, with its significant and diverse expenditure is better placed to influence and adopt CSR. Issues such as sustainability and the environment are important in the public sector. In the case of the private sector, CSR is becoming an essential element of corporate governance and organisations in the sector are realising that having robust CSR policies can improve the brand and have an impact on sales and profits.

o4. Outline the impact of THREE objectives in the 'not for profit' sector on procurement and supply chain activities.

Raising public awareness of their cause or lobbying government. The impact of this is that procurement must work with suppliers, whose values are aligned to those of the procuring organisation. Also, the need to manage reputation and reputational risk involves procurement in the way that money is spent To provide material aid and services to the public. This means that there are a wide range of stakeholders, including staff, donors, volunteers, beneficiaries, the media and regulatory bodies. The impact on procurement is that there must be transparency and audit trails to ensure that spending and decision making are clear and visible To provide representation services to members, which is often on a subscription basis from members. The impact on procurement is that limited funding is likely to be available, so that there is an emphasis on cost control and value for money. There is also the need for transparency so that members can see that their donations are being spent wisely Raising funds to carry out charitable and value driven activities. The impact of this is that the procurement team might have to act as retail buyers if goods are resold to raise funds. Procurement will therefore have to source goods of a quality, variety and distinctiveness that will appeal to consumers

O3. Explain the role of a shared services unit (SSU).

SSUs reflect a desire to centralise and share services The shared service provider becomes a dedicated provider of services such as; finance, HR, IT and procurement which continue to be provided internally An SSU manages costs and quality SLAs to demonstrate value for money. An SSU's benefits may be summarised as: • cost effective internal service; • liaison with its customers; • anticipating future demand; • employing resources and providing higher levels of service more cost effectively than if they were provided by a department or an external provider.

O2. Describe FOUR ways in which added value may be created for a buying organisation through an effective sourcing process.

Suppliers are motivated and are prepared to work with the buying organisation to reduce costs and add value. Suppliers are likely to want to share innovative approaches to add value. Suppliers are more likely to deliver products and services without defects, which reduces the costs of rectification. Suppliers may add value by sharing development costs and providing co-investment. Suppliers are more likely to reduce lost time by providing timely tender bids, documentation and deliveries. Suppliers are more likely to reduce wastage and add value by helping to identify unnecessary processes and overstocking.

O3. A manufacturer of electrically powered tools for the engineering industry consists of four separate business units, each of which undertakes its own purchasing activities. Discuss THREE benefits of centralising all purchasing activities with those of retaining the present decentralised structure. (2 of 2)

The benefits of retaining the present de-centralised structure include: 1. Local responsibility 2. Knowledge of the local environment, culture and customer needs 3. Skills development of buyers in each unit 4. Better communication and coordination between procurement and operating departments, 5. Customer focus: buyers are 'closer' to internal and external customers developing understanding of user needs and problems. 6. Quicker response to operational and user needs, 7. Smaller purchase quantities: 8. Accountability: d 9. Freeing central procurement units to focus on higher-level, value-adding tasks.

O2. Describe FOUR potential costs of using electronic systems in procurement and supply.

The high capital investment and set-up costs of the electronic systems, including hardware and software items The high initial learning curve costs, where users of the electronic systems will have to be trained to use them efficiently Possible costs arising from the failure of data security; this may be because of malicious access to data or loss of data The cost of compatibility issues, because suppliers will have to invest in the necessary technology to be able to work with their customers Possible redundancy costs, because electronic systems are faster and more efficient, meaning that fewer staff will be required

O3. Describe the roles typically undertaken within an organisation by: (i) The local procurement teams (ii) The central procurement team.

The roles of a local procurement team might have included sourcing small order items, sourcing emergency items to avoid disruption to production, sourcing from local suppliers and sourcing items used only by the local division. The roles of a central procurement team might have been described in terms of determining procurement and supply chain policies, preparing standard specifications, negotiating bulk contracts, procurement research and procuring capital assets.

O3. Outline FIVE disadvantages to an organisation of a devolved procurement function.

The staff involved may not be procurement specialists and procurement may be only a small part of their work. As a result they will not have specialist skills or knowledge and may not be able to select the best suppliers or monitor their performance It is likely that the consolidation of orders will not be possible, so that bulk discount or economies of scale are not achieved There may be less coordination of procurement activities and there may not be uniform procurement policies and procedures, as there would be in a centralised function. There is likely to be less standardisation of specifications, possibly leading to reduced quality and efficiency Conflict between different divisions or business units might arise, as they compete for scarce raw materials and there may be unequal budgetary allocations of procurement expenditure It may be more difficult to control procurement activities. When procurement is centralised it is easier to monitor procurement performance and compare it to defined KPI's

O1. The main focus for procurement and supply is that value can be added either by cutting costs or by securing operational efficiency. Describe FIVE methods through which value may be achieved in procurement and supply using these approaches

The use of value analysis, to eliminate non-essential features ; this technique involves looking critically at the elements that make up a product or service and investigating whether they are necessary Challenging user generated specifications, to minimise variety, stock proliferation and over-specification, with costs being cut as a result Consolidating demand, by aggregating orders or forming a consortium, in order to lower costs through bulk discounts or economies of scale Eliminating or reducing inventory, through systems such as JIT, to reduce the costs of holding stock International sourcing, to take advantage of low-cost country production, although this involves higher risks and higher costs, in terms of transport and possible taxes Negotiating with suppliers to reduce the cost of inputs Working with supply chain partners to minimise waste, with the technique of lean supply

O3. Explain THREE advantages to an organisation when adopting a devolved procurement structure.

There will be better communication and co-ordination between procurement and operations departments, because of their closer proximity Procurement staff are closer to internal and external customers, so that they can get a better understanding of their needs and problems There will be a quicker response to operational and user needs There will be a greater knowledge of and closer relationships with local suppliers There will be smaller purchase quantities, so that although economies of scale are sacrificed there will be reduced inventory costs It will free central procurement units to focus on higher level, value-adding tasks

O4. Explain how a purchaser in the public sector complies with the regulatory requirement for: (i) Competitive supply (ii) Accountability..

This might have been in terms of the public sector purchaser ensuring that competitive source selection procedures, such as competitive tendering, are used. For smaller spends, quotations should be obtained from a number of potential supplier (typically a minimum of three). For higher value spends, competitive tendering should be used. Answers to section ii, requiring an explanation of how a purchaser in the public sector complies with the regulatory requirements for accountability, should have referred to the rules laid down by government bodies. In the United Kingdom, these are the National Audit Office, the Audit Commission and the Public Accounts Committee. Candidates from outside the UK could have referred to similar bodies in their own country. These bodies monitor the achievement of value for money and public sector organisations must have detailed procedures and audit trails that can be monitored.

O3. Define the term 'Corporate Governance'.

This might have been the rules, policies, processes and organisational structures by which organisations are operated, controlled and regulated, to ensure that they adhere to accepted ethical standards, good practice, laws and regulations.

O4. Describe THREE objectives of public sector organisations.

To deliver essential services, not provided by the private sector, to an acceptable level or quality. To encourage national and community development, by developing education and skilling and stimulating economic activity. To pursue socio-economic goals, such as support for small and minority-owned businesses and the pursuit of sustainable development.

O4. Explain FOUR ways in which regulation might impact on public sector procurement.

To ensure that bought in materials, goods and services comply with defined public standards and specifications. To ensure that all procurement exercises are compliant with public policies and statutory procedures. To ensure that all supply chain operations are compliant with legal requirements, for example health and safety and environmental sustainability. There is a high requirement for accountability, so that audit trails must be maintained. Procurement in the public sector must be based on value for money, because taxpayers' money is being used. The tendering process is more likely to be more bureaucratic and time consuming, because of regulations such as EU Procurement Directives.

O4. Outline the impact of TWO private sector objectives on procurement and supply chain activities.

To maximise profitability. This puts the pressure on procurement to minimize costs, which might generate a competitive approach with suppliers. Methods of reducing cost might include outsourcing, international sourcing and value adding negotiations with suppliers Increasing market share, which might also involve cost reductions, or working with suppliers who are innovative. It might also involve forming long-term strategic relationships with suppliers to ensure that customers get the best possible products or services Corporate Social Responsibility, which will mean that procurement should only enter into contracts with suppliers who are ethical and environmentally friendly. It might also mean that contracts with suppliers have clauses covering CSR to ensure supplier compliance

O2. Describe FOUR ways in which added value may be created for a buying organisation through an effective sourcing process

Value might include getting the requirement correct first time and covering all requirements, stakeholder engagement and compliance, specifications to avoid rework and pre qualifying only the suppliers capable to meet the business needs. Motivating and including suppliers in the process can encourage longer-term investment, cost reductions, innovation, improved quality, stock and wastage reduction and sharing market knowledge.

O2. Describe TWO e-sourcing tools and their use in procurement and supply.

1. E-Catalogues 2. E-Tendering 3. E. Auction 4. Reverse Auctions 5. Online suppleir evaluation data

O1. Outline FIVE differences between purchasing goods and purchasing services.

1. Goods are tangible, services are intangible: 2. Services cannot be separated from their supplier: 3. Heterogeneity: goods are usually uniform in nature while services are unique at each delivery 4. Services 'perish' immediately on delivery whereas goods can be stored until required 5. Products are easier to specify, being tangible

O2. Explain THREE circumstances in which a competitive tendering exercise might not be the best approach to making a purchase.

1. Urgency 2. Commercial confidentiality or national security (e.g. military organisations): 3. Value of the purchase: 4. Production costs cannot be measured accurately: 5. Price is not the only criterion for supplier selection and contract award 6. Intellectual Property Rights and monopoly

O3. Explain THREE advantages to an organisation when adopting a devolved procurement structure

1. being close to stakeholders helps build relationships, understand requirements, communication, tap into user expertise. 2. Quicker response to environmental and requirements changes is also an advantage. 3. Closeness to local suppliers helps market knowledge, reduced transport times, cost and general supplier management. 4. Inventories can be reduced CSR use of SME's can be satisfied. Local accountability is improved and if a central procurement team remains, that team can focus on high value activities

O2. Explain THREE ways in which electronic systems can be used in the sourcing process.

1. internet 2. e-tendering (RFI/RFP/RFQ/RFX) 3. e- catalogues 4. e-auctions and reverse auctions 5. intranet. explain how each can be used in sourcing process

O1. FIVE elements of the total cost of ownership of capital equipment

1. pre acquisition costs 2. purchase price 3. operating costs 4. maintenance and repair costs 5. downtime costs and end of life/decommissioning costs

O1. It is widely believed that it is important to attempt to reduce costs and add value throughout the supply chain. Explain THREE innovative strategies that might achieve such goals

1. value engineering 2. lean supply 3. agile supply 4. TQM 5. JIT and 6. value added negotiations/relationships

O3. Define the term 'ethics'.

A definition is required and a variety of wording is expected but should reference that 'Ethics' are moral principles or values about what constitutes 'right' and 'wrong' behaviour. At a corporate level, there are the issues that face an organisation as it formulates strategies and policies about how it interacts with its stakeholders, including Corporate Social Responsibility, which covers policies that the organisation adopts for the good and wellbeing of stakeholders.

O3. examples of ethical or unethical behaviour that could be addressed in an ethical code for procurement professionals.

A range of examples are available and might include gifts, hospitality, personal interest, supplier favouritism, tendering when there is a definite supplier in mind, impartiality, accuracy and openness in information provided to suppliers, confidentiality, legal compliance, ensuring environmental issues and corporate social responsibility is followed by supplier

O4. Explain FIVE factors that impact on purchasing activities in the retail sector.

Bottom line thinking: Retailers do not add much value to the goods they sell and their margins are small. As a result, buyers must focus on goods that will sell well at the best possible profit margins Broad assortment: One of the functions of retailers is to make available to customers a wide range of goods offered by many different manufacturers. The number of stock lines and suppliers is high and buyers have to attempt to monitor prices, quality and supplier terms and conditions Buying against supplier specifications: Retailers generally buy what is available on the market, as described by suppliers, who determine the specifications. As a result, changing suppliers is easy for retailers and supplier relations are less durable Short feedback loop: In the retail sector, buying products and selling them are close together in time. As a result it quickly becomes apparent which products are selling and which are not. A fast response to such information is a key requirement for procurement Product mix: A retailer develops a product mix to maximise sales. This mix will change in line with seasons, tastes and fashion. Therefore retailers have to monitor contemporary themes among its customer base and ensure that customer feedback is accurate and regular Control of stock: The retailer will want to maintain sufficient stock to avoid stock-outs, or it may lose customers to competitors. On the other hand there is a need to avoid the cost of holding too much stock. The solutions are accurate demand forecasting,, responsive replenishment systems and agile supply chains, capable of delivering on short lead times

O3. Describe FOUR benefits delivered to an organisation by an outsourced procurement function.

benefits of expertise, skills, access to aggregated volumes (with other customers) leading to cost reductions, business can focus on core competencies, quality and service assured through KPIs and flexibility to resource through peaks and troughs in requirements

O1. potential benefits of a supply chain management (SCM) approach to procurement and supply

derive from eliminating waste activities, improving responsiveness in the continuous flow of value and other efficiency projects. Other benefits might include access to resources and expertise throughout the chain, collaborative quality management, improved communication, integrated systems and data share, co-ordinated demand forecasting, agility in faster lead-times and innovation, transparency reducing stock levels and waste.

O1. Outline why supply chain management (SCM) may be unattractive for some organisations.

high investment in finances and resource, a closer supplier relationship might not be appropriate if transactional purchases are involved, there are risks associated with closer relationships such as complacency and loss of control over confidential information.

O2. Explain the activities that could be undertaken by an organisation to identify and appraise potential suppliers as part of a sourcing process.

market analysis using current databases, the internet, trade shows, catalogues and directories, networking. Pre-qualification/appraisal ensures a supplier is able to perform a contract. Capacity, financial and technical capabilities can be appraised. The activities involved can be in the form of questionnaires, site visits, using set criteria (Caters 10Cs for example). Other activities include data gathering from certifications, references, samples, credit rating companies

O4. ways in which the objective of profitability in a private sector organisation might impact on its procurement activities.

pressure to focus on price and cost reduction, conflict with quality and CSR, adversarial approach to negotiations and transactional relationships, missed opportunities to create value

O3. Explain what is meant by the term 'devolved procurement' in relation to procurement structures.

shouldexplain the term 'devolved procurement' in relation to procurement structures. This might have been in terms of procurement responsibilities not being placed in the hands of a single, centralised department. Instead, procurement responsibilities are given to procurement officers in different divisions, strategic business units or user departments. In service organisations, it is common for procurement to be carried out by users or budget holders, rather than by procurement specialists.

O2. activities that take place post contract award

there are a vast range of answers to choose from such as expediting orders, payment, contract management, supplier management, contract review and learning lessons, any activity within the purchase to pay process and contract termination preparation

O2. sequential stages of a typical tendering process.

• An evaluation of the suitability of tendering as a procurement methodology, as compared to other methods; different forms of tendering, such as selective or open, might have been considered • Identification of the need, which might be through a bill of materials or requisition • The preparation of detailed specifications, to form part of the tender documents; different types of specification, such as performance or conformance, might have been considered • Determining a realistic timetable for the tender process, allowing a reasonable time for responses at each stage • The issue of the invitation to tender, accompanied by specifications; in the case of selective tendering, this would be by means of an invitation to bid, while in the case of open tendering, it would be by means of a public advertisement • The submission of completed tenders or bids by potential suppliers, within the specified deadlines • Opening of tenders on the appointed date, while tenders received after this date should be returned unopened; the tenders received should be logged, with the main details listed on an analysis sheet • Analysis of each tender, against the stated criteria, with a view to selecting the best offer; this will Leading global excellence in procurement and supply usually be on the basis of the lowest price or the most economically advantageous tender (MEAT) • Award of the contract to the successful bidder and advertisement or notification of the award • De-briefing unsuccessful tenderers, to enable them to improve their competitiveness in future bids

O4. Explain the impact of THREE objectives of a public sector organisation on its procurement activities.

• To deliver essential public services, such as education, healthcare and housing, which the private sector might not provide. A typical impact of this would be that procurement must ensure an adequate level of service in providing the goods and services needed in the education, healthcare and housing sectors. This might be achieved by comprehensive specifications, including KPI's and supplier performance monitoring • To encourage national and community development; examples might include developing education and skills, stimulating economic development and developing infrastructure, such as road networks and communications. The impact of this on procurement activities would be careful supplier selection and awarding contracts only to those suppliers with the capability to contribute to the appropriate types of development To pursue socio-economic goals, such as support for small and minority-owned businesses, the pursuit of sustainable development and environmental protection. Again, this would impact on the type of supplier chosen; these must be suppliers who can contribute to the above requirements and who's values are the same as the public sector organisation • Ensuring value for money and the efficient use of public funds, which mainly come from taxpayers. The impact of this would be rigorous supplier selection and awarding contracts only to suppliers who can provide the required level of service at the lowest possible prices