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1

1*

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

(i) The management of costs

(ii) Quality

16/03, 14/05 (10)

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

(i) The management of costs

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

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

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

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

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

  • Value analysis
    • Analysing the function of a material, part, component or system to identify areas of unnecessary costs
    • Asks:
      • whether the use of the item contributes value
      • Whether its costs is proportionate to its usefulness
      • Whether all its features are actually needed
      • Whether low cost is proportionate to its usefulness while retaining the features and functions that add value
  • Managing cash flow
    • Buyers can help an organisation’s cash-flow by increasing the time between receiving goods and then having to pay the suppliers for them.
    • This may mean ensuring that the contract includes an extended payment period that is different to those normally expected e.g. parties agree to 60 or 90-day payment terms instead of 30 day terms.
    • Additionally, buyers and suppliers may agree a payment plan that is different from standard approaches which ensures that the buying organisation can hold on to their cash for longer and make it work harder for them.
    • This type of approach can also help an organisation’s inflow of cash as it may enable them to sell their items on to their customers either through resale (retailers) or as part of finished goods (manufacturers). 
    • The buyer does, however, need to ensure that this approach is used wisely and with consideration of the impact this is going to have on the supplier. They need to consider whether the change to payment terms would have an unethical effect, e.g. on SME suppliers, or have a detrimental impact on a supplier’s ability to continue to do business.

  • Use of Information technology to streamline processes eg EDI and other e-procurement tools to:
    • Increase productivity and reduce labour costs; secure competitive pricing (eg through internet access to global markets or the use of e-auctions)
    • Support more efficient planning and decision making
  • Despite it often being expensive to implement initially, benefits can be seen in relation to reduced resource costs, labour and time and ensure that required tasks are completed effectively and efficiently.
  • Procurement’s use of information technology has resulted in the provision of more, real-time information that helps them with forecasting, inventory planning as well as the ability to secure more competitive pricing through e-options such as e-sourcing and e-auctions. Tools such as MRP support inventory reduction as it is a powerful and accurate planning system.
  • Supplier management is made easier as information technology can aid better decision making with improved supplier performance data. Integrating systems with partnership suppliers reduces costs long term as suppliers can better meet the needs of a buyer.

 (ii) Quality

Improved quality adds:

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

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

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

Procurement can add value through quality improvement by:

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

 

2

1*

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

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

p.65

  • The development of trust (or mutual dependence)
    • Encourages:
      • information sharing,
      • joint working, 
      • fewer or better resolved disputes and
      • systems of continuous improvement.
    • The sharing of information can also achieve joint planning thus creating demand led supply chains that can help avoid the creation of unnecessary inventory or capacity.
  • Improved business efficiency can be achieved through

    • integration of management information and communication systems including

      • work scheduling,

      • better information sharing,

      • joint procurement activity and

      • ordering and billing routines.

    • Also efficiency can be used through introduction of initiatives such as waste reduction.

  • Potential for value-adding synergy

    • Goodwill and trust enables both parties to work together creatively on business projects and provides greater potential for
      • synergy, 
      • sharing ideas and
      • loyalty in the face of problems and possibly disputes (ie contract disputes, slower demand)
    • Preferential treatment may be given over a supplier’s other customers based on the longevity and quality of the relationship  (i.e. first call on scarce supplies, fast tracking and flexibility when required)
    • There may be opportunities for collaborative promotions (i.e. between a supplier and a retail buyer)

3

1

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

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

Describe Give a full account or a detailed representation of something

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

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

p.59

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

4

1*

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

(i) Threat of new entrants to a market

(ii) Power of suppliers

(iii) Power of buyers

(iv) Potential product or service substitutes

(v) Competitive rivalry

 

25 marks

Mar 2017, Jan 2015, July 2013

 

Explain how the following competitive forces might impact on supply chain relationships:

  (i) Bargaining power of suppliers in a market     (ii) Threat of new entrants to a market     (iii) Potential substitute products   (iv) Competitive rivalry  17/7, 15/11

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

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

(ii) Power of Suppliers (p.45)

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

(iii) Power of buyers (p.45)

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


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

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

(v) Competitive rivalry

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

5

1*

Explain and illustrate with a diagram:

(ii) A risk assessment matrix.

15 Marks

May 2017

p.28

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

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

                                         | Impact/effect on organisation |

                                         |       LOW          |   HIGH              |

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

                            LOW    |           A            |             C           |

                                        |-----------------------------------------------

                          HIGH    |           B            |             D           |

                                        |-----------------------------------------------

 

Segment A: 

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

Probability/Likelihood: Unlikely to happen

Consequence/Impact:  Little effect

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

 

Segment B: 

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

Probability/Likelihood: Relatively likely to occur

Consequence/Impact:  No major effect

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

 

Segment C: 

Risk: Business failure of a supplier of critical requirements

Probability/Likelihood: Events are unlikely to happen

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

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

 

Segment D: 

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

Probability/Likelihood: Relatively likely to occur

Consequence/Impact:  Serious impact

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

6

1*

Explain and illustrate with a diagram:

 (i) A supplier preferencing matrix.

10 Marks

May 2017

 

 

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

p.32 

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

 

 

                                      |      HIGH       |     Development    |            Core         |

     Attractiveness         |    ------------------------------------------------------------------------

        of buying              |       LOW        |        Nuisance        |        Exploitable   |

      organisation           |    -----------------------------------------------------------------------

                                      |                       |             LOW           |            HIGH         |

                                           < -----------Value of Buyer's Business------------------->

                                                      

NUISANCE

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

EXPLOITABLE

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

DEVELOPMENT

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

CORE CUSTOMERS

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

7

1*

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

10 Marks

Nov 2017

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

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

8

1*

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

cost management:

(i) Value-analysis

(ii) Extending payment terms 

(iii) Use of information technology

 

15 Marks

Nov 2017

(i) Value-analysis

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

(ii) Extending payment terms 

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

(iii) Use of information technology

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

9

2*

(a) Explain the following types of dispute resolution:

  (i) Mediation

  (ii) Arbitration

  (iii) Adjudication.

15 Marks

May 2016

(i) Mediation (p.120)

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

 

(ii) Arbitration (p. 118)

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

 

(iii) Adjudication (p.120)

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

 

10

2*

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

10 Marks

May 2016

ALSO:

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

15 Marks July 2016, Jan 2015, Nov 2013

p.117

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

11

2*

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

10 Marks

July 2016, Jan 2015, Nov 2013

p. 106

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

12

2*

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

(i) Applicable law

(ii) Force Majeure

 

(10 marks)

Nov 2016, Jul 2015

i) Applicable law (p.93)

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

 

ii) Force Majeure (p.91)

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

 

 

13

2*

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

(i) Conditions

(ii) Warranties

(iii) Innominate terms

 

(15 marks)

Nov 2016, Jul 2015

(i) Conditions (p.100)

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

(ii) Warranties (p. 100)

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

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

(iii) Innominate terms (p. 101)

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

 

 

14

*2*

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

(10 Marks)

Jan 2017

p. 83

Benefits of model form contracts:

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

Disadvantages:

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

15

2*

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

i. Time is of the essence

ii. Retention of title

iii. Force majeure

(15 Marks)

Jan 2017

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

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


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

(iii) Force Majeure (p.91)​

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

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

A force majeure clause should:

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

16

*2*

Explain FIVE essential elements of a legally binding agreement.  

 

25 Marks

Nov 2017, Nov 2015

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

17

3*

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

5 Marks

March 2016

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

18

3*

b. Explain TWO advantages and TWO disadvantages of contract management

20 Marks

March 2016

p.149

Disadvantages

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

 

Advantages

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

 

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

19

3*

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

I. Ordering and payment responsibilities (p.161)

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

III. Contract development (p.156)

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

V. Contract termination. (p.162)

 

25 Marks

July 2016, Nov 2013

 

 

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

i.  Ordering and payment responsibilities;  

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

ii. Risk assessment and risk management;

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

iii.  Contract development;

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

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

 

 

iv.  Contract maintenance, updating and change control;  

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

v.  Contract termination;

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

20

3*

Explain the responsibilities of a contract manager in relation to:

i. Performance management (9 marks)

ii. Relationships management (8 marks)

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

(25 Marks)

Jan 2017, Jan 2015, March 2014


i. Performance management

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

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

The approach will depend on the type of  contract ie

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

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

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

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

 

iii. Contract document management and change control

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

21

*3*

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

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

10 marks

July 2017,  May 2015

p.140

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

 

 

Candidates could choose from a number of different approaches to assess risk, Kraljic, STEEPLE and SWOT or a risk assessment matrix to assess contractual risk, such as the well-known ‘likelihood’ vs. ‘consequences/impact’ matrix, or similar,  being most commonly used.  In order to then achieve the full 10 marks they were required to explain how the
approach that they selected would be used in risk assessment, with or without use of a diagram to help illustrate their points.  The emphasis need to be on contractual risk rather than on generic risks.   
 
The question asked for an ‘approach’ to assessing contractual risk, and as such a narrative was required which provided a start, middle and end to the process. Typically Candidates who received a pass or higher mark for this question used the following approach to structure their answer; 

How to identify risks inherent in the contract (these could relate for example to; delivery time, quality, intellectual property.​

How risks would be categorised.  This recognised that risks may have different consequences and different  probaility of occuring and they needed to explain how their chosen approach would distinguish which  contractual risks are likely to have the worst consequences for the procurement organisation and are most likely to occur

How risks would then be recorded, often providing details or an illustration of a risk register. 

22

3*

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

15 marks

July 2017, May 2015

 

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

p.155

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

23

3*

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

10 Marks

Nov 2017, Nov 2014

p. 138

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

24

3*

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

15 Marks

Nov 2017, Nov 2014

p.159

  • Expediting
    • Expediting means to assist the progress of something
    • If the buyer has any concerns about delivery (because the supplier is less than reliable on because on time delivery is critical) orders made under the contract may require expediting
    • Expediting should ideally be a proactive role rather than a reactive firefighting role as part of contract management: taking planned steps to ensure that suppliers are able ad on schedule to deliver as agreed in the supply contract
    • Not all orders will be worth the effort and expense of expediting so it is important to prioritise deliveries and identify
      • orders of higher risk of delivery problems ( reasons could be that supplier is unknown to the buyer or has a poor/variable track record)
      • the potential consequences of delivery problems that are more severe (reasons could be that the material is critical to production processes or the organisation has low safety stocks)
    • Expediting tasks could consist of:
      • Ensuring that delivery deadlines and specifications are clearly set out and if any changes are made, they are clearly communicated and agreed
      • Maintaining project and production schedules and time-phased material requirements (e.g. in an ERP system).  A project expeditor may maintain critical path network charts and/or Gantt charts showing the optimum and latest times at which supplies are required for each stage of the project.  For regular supplies a simple diary system may be sufficient to flag which orders need to be expedited on a given day or week.
      • Monitoring or enquiring about supplier progress at key stages (without micro managing) or developing a system of reporting by exception where the supplier notifies the expeditor of any stage deadlines missed or potential problems identified
      • Working with suppliers to solve any identified problems.  The expeditor may have to
        • persuade a supplier to give priority to the order or buying organisation
        • offer help with production difficulties
        • offer help in souring any materials or information which may be holding the supplier up
      • Requiring notification of dispatch of goods and using track and trace facilities where available to monitor their progress in transit
      • Placing pressure on delinquent suppliers where required reminding them of late delivery penalties (e.g. liquidated damages clauses) or involving senior managers in problem-solving or enforcement discussions
      • And when necessary use contingency plans to search for alternative suppliers, existing stocks or substitute goods to meet an emergency shortage due to delivery delay
  •  

  • Payment Responsibilities
    • Payment of the supplier on agreed terms in return for goods or services is a basic contract obligation for the buying organisation and the supplier has legal remedies for breach of contract by the buyer in the event of non-payment or late payment
    • It is the responsibility of the contract manager to ensure the relevant budget holder authorises and actions payment on agreed terms and schedules
    • Generally the supplier will send an invoice and the buyer should check that it corresponds with the order/contract (in regard to agreed price, instalment schedule and payment terms) and the goods are delivered as contracted and then either
      • queries the discrepancies or
      • authorises the payment of the invoice
    • Invoices should be paid within the period stated in the agreed terms of trade.  Credit periods can affect cash flow both the buyer and supplier
    • It is part of ethical trading to pay the invoice on time as agreed and it affect the buyer's standing as an attractive (or unattractive) customer for suppliers and the ongoing relationship with the supplier
    • Commercial payments are often made by electronic credit transfer though the banking system which is safe and swift
  • Post-contract lessons management
    • The contract management team should intentionally review the contract's history and outcomes and gather feedback from a range of stakeholders on
      • what went right and what went wrong in the performance and management of the contract
      • how things could have been done more effectively or efficiently
      • what new knowledge or lessons have emerged from the contract and should be carried forward to future contracts and contracting processes

25

*4*

a. Explain the term 'supplier development'.

5 Marks

March 2016

p.210

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

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

26

4*

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

10 Marks

March 2016

p.210

 

Directive approach

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

Facilitative approach

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

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

 

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

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

27

4*

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

The buyer's perspective (5 marks)

The supplier's perspective (5 marks)

10 Marks

March 2016

p.213

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

Buyer's perspective:

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

 

Supplier's perspective:

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

 

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

28

4*

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

 

(16 marks)

Nov 2016

p. 204

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

29

4*

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

 

(9 marks)

Nov 2016

p.205

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

30

4.*

Supplier relationship management includes the measurement of supplier performance.

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

(25 Marks)

Jan 2017

 

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

p.192

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

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