L4M2- Chapter 1- Developing the business case

Question 1

Define new purchase, modified rebuy and straight rebuy

Answer 1

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

Question 2

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

Answer 2

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

Question 3

What is a sourcing strategy?

Answer 3

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

Question 4

How would you define the scope of the sourcing strategy?

Answer 4

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)

Question 5

What is the scope for a sourcing strategy?

Answer 5

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

Question 6

What is a business case?

Answer 6

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

Question 7

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

Answer 7

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

Question 8

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

Answer 8

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

Question 9

What is the 5 whys analysis used for?

Answer 9

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

Question 10

What is the Kepner-Tregoe approach?

Answer 10

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?

Question 11

What is the SCAMPER acronym used for?

Answer 11

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

Question 12

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

Answer 12

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

Question 13

What is procurements role in developing the business case?

Answer 13

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

Question 14

What is the product life cycle?

Answer 14

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

Question 15

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

Answer 15

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?

Question 16

What is desk research?

Answer 16

AKA secondary research

Gathering information from published sources.

E.g. Mintec

Question 17

What is field research?

Answer 17

AKA primary data

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

Question 18

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

Answer 18

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

Question 19

What is the difference between direct and indirect costs?

Answer 19

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

Question 20

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

Answer 20

Inbound logistics
Operations
Outbound logistics
Marketing and sales
After sales service

Question 21

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

Answer 21

Firm infrastructure
HR
Technology development
Procurement

Question 22

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

Answer 22

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

Question 23

What is break even analysis?

Answer 23

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

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

Question 24

What is a break even point?

Answer 24

The breakeven point is where sales revenue equals total cost

Question 25

What is procurement cost analysis (PCA)?

Answer 25

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

Question 26

What is price analysis?

Answer 26

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

Question 27

What is cost analysis?

Answer 27

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

Question 28

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

Answer 28

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

Question 29

What is WLAM?

Answer 29

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

Question 30

What are the 3 stages in calculating WLC?

Answer 30

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

Question 31

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

Answer 31

- 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

Question 32

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

Answer 32

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

Question 33

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

Answer 33

- 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

Question 34

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?

Answer 34

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

Question 35

What is a hybrid strategy?

Answer 35

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

Question 36

What is a cost benefit analysis?

Answer 36

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

Question 37

What is benchmarking?

Answer 37

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

Question 38

What are the 4 types of benchmarking?

Answer 38

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)

Question 39

What is a financial budget?

Answer 39

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)

Question 40

What is a financial ratio? What is return on capital employed? (ROCE) What is Net Present Value? (NPV)

Answer 40

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

Question 41

What is a financial model?

Answer 41

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

Question 42

What is a cost model?

Answer 42

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

Question 43

In finance, what is an accrual?

Answer 43

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

Question 44

What is a cash flow statement?

Answer 44

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

Question 45

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

Answer 45

- 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)

Question 46

What is a zero based budget?

Answer 46

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)

Question 47

What are the benefits and challenges of internal benchmarking?

Answer 47

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

Question 48

What are the 4 types of benchmarking? Hint- ICFG

Answer 48

Internal Competitive Functional Generic

Question 49

What are the benefits and challenges of competitive benchmarking?

Answer 49

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

Question 50

What are the benefits and challenges of functional benchmarking?

Answer 50

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

Question 51

What are the benefits and challenges of generic benchmarking?

Answer 51

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

Question 52

What is a cost benefit analysis?

Answer 52

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

Question 53

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

Answer 53

Revenue Dividends Interest Direct costs Investment Overheads

Question 54

What is a quality function deployment (QFD)?

Answer 54

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

Question 55

What are mendelow and kraljic matrix used for?

Answer 55

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

Question 56

What are the 4 main categories of cost?

Answer 56

Development Implementation Operating End of life They all form part of WLC

Question 57

What is in the cash flow cycle?

Answer 57

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

Question 58

What types of variances are there to budget?

Answer 58

Price Quantity Labour Overhead

Question 59

What is price variance?

Answer 59

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

Question 60

What is quantity variance?

Answer 60

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

Question 61

What is labour variance?

Answer 61

Difference between actual and budgeted wage costs

Question 62

What is utilities variance?

Answer 62

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

Question 63

What is the business need?

Answer 63

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

Question 64

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

Answer 64

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

Question 65

Why is cash flow different for a service?

Answer 65

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