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L4 > L4M2- Chapter 1- Developing the business case > Flashcards

L4M2- Chapter 1- Developing the business case Flashcards

1
Q

Define new purchase, modified rebuy and straight rebuy

A

New purchase- Completely new business requirement
Modified rebuy- Small changes to a straight rebuy
Straight rebuy- Something bought previously

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2
Q

A way to identify the business need is to use the model RAQSCI- What does the acronym stand for?

A

R- Regulation
A- Assurance of supply
Q- Quality
S- Service
C- Cost
I- Innovation

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3
Q

What is a sourcing strategy?

A

Channels of supply at the optimal cost- done by reviewing current needs against purchase opportunities. It should be a continuous cycle.

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4
Q

How would you define the scope of the sourcing strategy?

A

Are there geographical boundaries? (is the technology available in your country of need)
How long is the strategy going to last? (if a supplier needs to buy parts they need to have a timescale that will be long enough to make money)
Are there any organisational boundaries? (does the strategy overlap with another agreement)

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5
Q

What is the scope for a sourcing strategy?

A

The scope determines what can and cannot be considered as part of the strategy

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6
Q

What is a business case?

A

Simply is a justification for undertaking an action. It should capture benefits, risks, timescales and responsibilities of those involved.

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7
Q

What are some examples of why a business case may need to be prepared?

A

A contract is coming to an end
Cost reductions need to be made
Alternative product or services have increase benefits

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8
Q

What is a closed problem?
What is an open-ended problem?

A

Closed- Something happens that should not have happened e.g. price of a raw material suddenly skyrockets

Open-ended- something is stopping the achievement of an objective or blocking progress. e.g. agreement is required from senior management before additional budget is defined for the new org structure

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9
Q

What is the 5 whys analysis used for?

A

Identifying the key cause of a problem.

By asking why 5 times you identify what the real problem is and can make decisions on next steps

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10
Q

What is the Kepner-Tregoe approach?

A

Used to solve problems (after you have used the 5 why analysis to identify the problem). It involves asking a sequence of 8 questions covering the problem, its uniqueness, where it is happening, who it involves and when does the problem occur.

Often phrased like:
What is the problem?
What is not the problem?

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11
Q

What is the SCAMPER acronym used for?

A

When solving problems the SCAMPER acronym can be used to generate/stimulate options for addressing issues:
S- substitute
C- combine
A- adapt
M- modify
P- put to other uses
E- eliminate
R- reverse

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12
Q

What should be contained in the Exec Summary of a business case?

A

This is the business case on a page- a top line, clear, persuasive and comprehensive of the business case contents

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13
Q

What is procurements role in developing the business case?

A

1) identify the opportunity or problem- e.g. contracts coming to an end

2) Solving the problem- Understand the current situation, understand what is known, review the issues, what are the options (think of SCAMPER acronym), selecting the best option, implementing the plan, reviewing if objectives have been achieved and understanding what can be improved

3) Preparing the business case- writing the different sections e.g. exec summary, requirements, cost analysis, market analysis, risk analysis, technical requirements etc

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14
Q

What is the product life cycle?

A

Development of a product from scratch
Bringing the product to the market place
Sales in the market
Decline and removal

Often graphically represented with 4 stages- introduction, growth, maturity and decline

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15
Q

How is the business need different in a straight rebuy vs modified rebuy?

A

In a straight rebuy you will be purchasing exactly the same product with and agreed spec, often from an approved list of suppliers.

Modified rebuys require some level of change so the business need has to be reviewed (often through a sourcing strategy). e.g. thinking about what do we need to buy? who can we buy it from? who offers what? how much does it cost?

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16
Q

What is desk research?

A

AKA secondary research

Gathering information from published sources.

E.g. Mintec

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17
Q

What is field research?

A

AKA primary data

Collecting raw or original data (can be qualitative- eg thoughts and feelings or quantitative eg data/statistics)

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18
Q

What is a pricing strategy?
What are some examples of pricing strategies?

A

The factors and organisation will consider when selling an end product or service to the customer

E.g.
- Market penetration- using a lower price to gain market share
- Market skimming- used when theres less competition and anew product can be priced high
- Marginal- any sales after the breakeven point are profit
- going rate- charge the same as competitors
- cost plus- the cost price plus a margin

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19
Q

What is the difference between direct and indirect costs?

A

Direct- Costs that can be specifically attributed to a specific project

Indirect- aka overheads, costs that cannot be easily attributed to a product or service

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20
Q

What are the primary activities in Porters Value Chain? (hint- there are 5)

A

Inbound logistics
Operations
Outbound logistics
Marketing and sales
After sales service

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21
Q

What are the support activities in Porters value Chain? (hint- there are 4)

A

Firm infrastructure
HR
Technology development
Procurement

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22
Q

What is a fixed vs variable cost?
What is semi variable?

A

Fixed costs do not change with output (e.g. office rent)
Variable costs vary with output (e.g. raw materials)

Some costs can be semi variable- e.g. electricity is a fixed cost but can be variable if it is linked to output like running machinery

Semi variable- a cost made up of both a fixed and a variable cost- e.g. a small organisation may need a pay by the hour accountant, then when large enough they will take them on full time as a fixed cost

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23
Q

What is break even analysis?

A

Sales revenue = R
Variable cost = V
Fixed cost = F
Units = Q
Marginal profit = R-V

Breakeven point:
F = Q x (R-V)

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24
Q

What is a break even point?

A

The breakeven point is where sales revenue equals total cost

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25
Q

What is procurement cost analysis (PCA)?

A

Analysis of the cost of material, component and activities that make up a purchased item.

At ORL we would refer to this as a cost stack

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26
Q

What is price analysis?

A

Approach to test whether the price paid for goods or services is fair. It involves comparing the price against yardsticks of reasonableness.

At ORL this may be price comparisons vs tesco

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27
Q

What is cost analysis?

A

Looking at the individual components that make up the price and asks if they are fair.

Often needs to be coupled with price analysis to be useful

28
Q

Which sources of data could be used to conduct a price analysis?

A

1) prices paid in the past
2) published prices
3) pricing formula

29
Q

What is WLAM?

A

Whole Life Asset Management

Evaluating the total price and all associated costs of a product to make an informed decision as to which option will provide the best value for money

30
Q

What are the 3 stages in calculating WLC?

A

1) Planning- Determine the budget, develop contract, support requirement, specification of the asset, outputs of the asset.
There are 3 types of model that can be used- decision support, simulation and optimisation models

2) Preparation- testing the models from the planning stage, investigate any further costs to create and accurate result

3) Implementation- Implement the model to get results and any future recalculations

31
Q

What models can be used during the planning phase of WLC to calculate costs?

A
  • Decision support models: generate potential solutions and rank based on criteria e.g. ease of implementation
  • Simulation models: Use a simulation to calculate the likely outcome in terms of cost- e.g. a Monte Carlo Model which is a mathematical modelling. This finds the most probable costs with 95% probability
  • Optimisation models: often used for inventory modelling of WLC and the sufficient levels of stock required to meet need
32
Q

What are the 3 trends that can help decide the importance of strategic issues?
Hint- related to issues management

A

1) External trends- trends in the global marketplace, economic/political factors and the emergence of new markets/technologies. These tend to be time sensitive

2) Internal trends- The size and complexity of the organisation, roles, management styles. These tend to be less time sensitive

3) Performance trends- organisational growth, profitability, flexibility

By writing a list for each of these trends and assessing the priorities you can identify gaps vs the business objective

33
Q

What are the key considerations in developing a business case?(COCCOSI)

A
  • Cost benefits e.g. improved profitability
  • Options e.g. types of intervention
  • Cost benefit of each option
  • Competitor analysis e.g. benchmarking
  • Organisational needs (inc risk) e.g. meeting strategy including sustainability
  • Stakeholder requirements
  • Implementation plan
34
Q

Strategic options in a business case helps identify how objectives will be achieved. Often it requires an intervention in the way that business works. There are 6 types of intervention, what are they?

A

1) Market intervention- influencing the market e.g. make vs buy
2) Technical intervention- Rationalising or simplifying spec
3) Cost structure intervention- deploy value analysis or other techniques e.g. lean/TCO
4) Work process interventions- Joint planning with suppliers to create breakthrough in cost and provide and advantage
5) Supplier relationships- leveraging suppliers to access improved capabilities or supplier performance
6) Supply chain interventions- eliminate unnecessary intermediaries or outsourcing for scale

35
Q

What is a hybrid strategy?

A

Strategies that combine the best parts of two or more strategies.

This can be done by comparing strategic solutions in turn and scoring them based on certain criteria

36
Q

What is a cost benefit analysis?

A

Carried out by adding up all of the financial benefits of an option and subtracting all of the costs associated.

E.g. payback periods, switching costs, revenue earned, TCA

37
Q

What is benchmarking?

A

A tool to identify standards of excellence by searching for the best methods, processes and practices.

38
Q

What are the 4 types of benchmarking?

A

Internal/Departmental: compare to similar processes in the same organisation (e.g. hospital wards)

Competitive: compared to a direct competitor (e.g. army may compare to the navy or ORL may compare to Tesco)

Functional: compared to the same process but in an organisation in a different sector (e.g. government tax compared to a credit card company)

Generic: comparing unrelated business processes that are carried out in a similar way (e.g. barcodes in an airport vs grocery)

39
Q

What is a financial budget?

A

A plan for a defined period, typically 12 months, that outlines revenues or costs (or both)

They are created from financial modelling and helps an organisation understand if it will have the funds to meet obligations (or have surplus to reinvest)

40
Q

What is a financial ratio?

What is return on capital employed? (ROCE)

What is Net Present Value? (NPV)

A

Ratios are analytics tools used to identify and monitor trends in organisation performance using two or more numerical values from financial statements

ROCE- return on capital employed is a ratio used to assess organisational efficiency to generate profit from capital used

NPV-An accounting term for the value created in the future based on todays value. An investment should generate greater cash flow than the funded expended

41
Q

What is a financial model?

A

Using historical data and assumed metrics (cost and revenue) to project forecasts of the future state of the company. Usually they are simple spreadsheets.

42
Q

What is a cost model?

A

The assessment and calculation of all costs related to delivering a product or service.

They are essential to the business case because they estimate the overall profitability that a venture will bring

43
Q

In finance, what is an accrual?

A

A financial adjustment that reflect activity that has occurred but may not have been paid for yet

44
Q

What is a cash flow statement?

A

a financial statement that summarises the movement of cash in and out of an organisation.

45
Q

What are some of the advantages to budgeting/ budget control?

A
  • Makes management think about the future and set out detailed plans
  • Promotes coordination and communication
  • Requires responsibility for the achievement under personal control of managers
  • Provides a yardstick to measure actual performance
  • Enables remedial action to be taken if performance changes
  • Motivates employees if they are involved in setting budgets
  • Promotes management by exception (independent working and only involving management when there are specific exceptions)
46
Q

What is a zero based budget?

A

The definition of the budget is from scratch rather than using last years budget as a starting point. Idea is it will create more innovative ways to deliver and thus make teams more efficient (rather than just adding an inflation measure to last years budget)

47
Q

What are the benefits and challenges of internal benchmarking?

A

Pros:
Cost effective
Easy
Low cost
Fast
Easy to transfer to other forms of benchmarking

Cons:
Mediocrity
Limited oppos for growth
Can create unhealthy competitiveness
May not be best in class

48
Q

What are the 4 types of benchmarking?
Hint- ICFG

A

Internal
Competitive
Functional
Generic

49
Q

What are the benefits and challenges of competitive benchmarking?

A

Pros:
Compares to a similar process
Gives a good understanding of a competitor
Could form a partnership with competitor
Compares to an organisation facing similar regulatory issues

Cons:
Performance improvement may be low
Can be perceived as a threat
May be limited if there are intellectual properties
May not be best in class
Competition may capitalise on weakness

50
Q

What are the benefits and challenges of functional benchmarking?

A

Pros:
Provides industry trend info
Quantitative comparisons
Improvement rates can be better

Cons:
Organisations may have diverse corporate cultures
Organisations may be overly specific
Common functions can be difficult to find
Takes more time than internal

51
Q

What are the benefits and challenges of generic benchmarking?

A

Pros:
Non competitive
Provides broader and different perspective
Innovative
Multiple industries
Global

Cons:
Hard to identify best in class
Best in class are inundated/busy with requests
Long time planning
Difficult for some to understand

52
Q

What is a cost benefit analysis?

A

Deciding on a course of action based on its commercial impact

However, some decisions will be made based off non commercial decisions e.g. political, environmental, reputational

53
Q

What are some of the main elements/ categories of cost entry that effect cash flow?

A

Revenue
Dividends
Interest
Direct costs
Investment
Overheads

54
Q

What is a quality function deployment (QFD)?

A

Structured approach to defining customer requirements and translating them into product spec

55
Q

What are mendelow and kraljic matrix used for?

A

Mendelow = stakeholders- interest vs power
Kraljic = segment suppliers- risk vs importance

56
Q

What are the 4 main categories of cost?

A

Development
Implementation
Operating
End of life

They all form part of WLC

57
Q

What is in the cash flow cycle?

A

Receive raw materials/components
Manufacture products
Store
Pay suppliers
Sell
Get paid

58
Q

What types of variances are there to budget?

A

Price
Quantity
Labour
Overhead

59
Q

What is price variance?

A

The overall impact a change in price paid has on the cost variance

60
Q

What is quantity variance?

A

This is the overall impact that a change in quantity has had on a cost variance (ie deviation to budget)

61
Q

What is labour variance?

A

Difference between actual and budgeted wage costs

62
Q

What is utilities variance?

A

This is the impact of a change in utilities cost has on a variance. It is where the utilities cost is greater or less than budgeted for a level of output

63
Q

What is the business need?

A

Also called the business requirement- the activities required by an organisation to provide value

64
Q

Which costs should be considered under WLC? (hint APEN)

A

Acquisition costs
Preparation and maintenance
End of life costs
Non value add (e.g. scrap)

65
Q

Why is cash flow different for a service?

A

Services cannot be stored as inventory

Services are intangible so measuring quality can be difficult

Production and consumption are simultaneous so demand and capacity is a key balance

Services often result in a wide variety of products from the same cost base- think about consultancy- so need to carefully consider what you are paying for

66
Q
A

L4 (18 decks)

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