L4M6- Chapter 1- Relationships in supply chains

Question 1

When would you want to create something internally?

Answer 1

Part of the make or buy decision
Internal normally are products and services that are core to the organisation
You want a high degree of control
Continuity of supply
The relationship is internal
Improved quality due to control of production
Potential for lower costs
Protection of IP

Question 2

What are the disadvantages to creating something internally?

Answer 2

Unless benchmarked against external you do not know if you are getting value for money
Could argue that internal has both fixed and variable cost, where getting external could be transactional so could just be variable
No money is changing hands so could be less motivated
Could become out of touch with trends
Requires investment internally e.g. ownership of machinery

Question 3

Why might an organisation not be able to make something in house?

Answer 3

High cost
Legislative barriers e.g. requirement for license
Skills shortage
Access required to patented items

Question 4

What is ESG?

Answer 4

Environmental, social and governance

It is a measurable sustainability assessment, similar to CSR but more measurable and specific

A set of standards for company behaviour

Question 5

What are the advantages of using an external supplier?

Answer 5

Experts in a field
Cost effective (economies of scale)
Free up internal resource
Access to patents
Flexibility to meet challenges
useful for small volumes (e.g. if you made in house the equipment would be prohibitive

Question 6

What are the disadvantages of using an external supplier?

Answer 6

Dependency on the supplier
Damage to reputation if supplier is unethical
Cost/risk of transport
Relationship management risks

Question 7

What is the CIPS relationship spectrum?

Answer 7

A continuum that shows the breadth and range of relationships that can exist between supplier and buyer.

Ranks level of commitment of the supplier and level of commitment of the buyer

Starts at adversarial (low on both) and goes up a linear graph to co-destiny

Question 8

What are the 5 things that define the relationship types in the CIPS relationship spectrum?

Answer 8

Trust level

Transparency/openness

Commitment to the relationship

How risk is managed

Frequency and quality of comms

Will also need to consider:
Spend level
Risk of product
Duration of contract
Level of innovation required

Question 9

What is the Kraljic matrix?

Answer 9

Allows a buyer to determine the level of relationship required with a supplier

Compares level of risk v level of spend

1) Routine
2) Leverage
3) Bottleneck
4) Strategic

Question 10

What is the Steele and Court matrix?

Answer 10

Used by a buyer to assess what the supplier views the buyer.

It helps to determine negotiation styles, communication strategy, T&Cs etc

In a good relationship the two matrix should align e.g. core and strategic across the matrix

Compares attractiveness and proportion of spend

1) Nuisance
2) Development
3) Exploitable
4) Core

Question 11

What are negotiation tactics?

Answer 11

Methods and strategies used by both buyers and sellers to enhance their commercial situation

Question 12

What are the three basic ways that conflict can be worked out?

Answer 12

Win-lose- One party gets what they want at the expense of the other aka the supplier/buyer gets a bigger piece of the pie

Lose-lose- neither party gets what they want aka both getting a smaller piece of pie than they wanted

Win-win- Beneficial to both aka expanding the pie

Question 13

What are the 6 stages of a typical supplier relationship?

Answer 13

Qualification- Reaching out to the marketplace, Carters 10 Cs

     ----->>>>On boarding- Once identified RFI and RFW help identify those worth selecting

Segmentation and risk management- Second phase is looking at the products a supplier provides and understand the type of relationship that is required

Performance management- periodic review of the suppliers performance, part of contract management

Development and innovation- time consuming so only for strategic suppliers, should be a two way process, should have measurable benefits

      ----->>>Phase out (if required)- inevitably some relationships will end, could be due to end of contract, retendering process, termination due to a material breach, supplier becomes insolvent

Question 14

What are carters 10 Cs?

Answer 14

Clean
Capacity
Culture
Cost
Cash
Communication
Consistency
Control
Commitment
Competency

Question 15

What is gearing?

Answer 15

A measure of how a business is doing based on a ratio of its debt to equity, quality of debt and cost of debt

Question 16

What is supplier development?

Answer 16

The process of working with a supplier to develop its products and services it delivers. The primary aim is commercial gains for the buying organisation, but it will also be wins for the supplier

It is time consuming and therefore should be saved for strategic suppliers relationships

Question 17

What benefits can be achieved from supplier development?

Answer 17

Can benefit both buyer and supplier
Reduce costs
Elimination of waste, improving value
Long term business security
Motivation

Question 18

What is a material breach?

Answer 18

Within a contract this is failure of performance. It tends to be so great that it gives the other party the right to terminate the contract and sue for damages potentially

Question 19

What is TUPE legislation?

Answer 19

Transfer of undertakings protecting employment

These protect the rights of the employees if a business is transferred to say new ownership

Question 20

What are the 3 types of matric that will help do portfolio analysis?

Answer 20

Kraljic- Supply positioning of risk vs importance

Steele and court- supplier preferencing

Market management matrix

Question 21

Why would a procurement department do an exercise to understand positioning of suppliers/ portfolio?

Answer 21

Focus on available resources that add value
Opportunities to develop a competitive advantage
Providing a framework for decision making
Improving risk management

Question 22

What is on the kraljic matrix and how is it measured

Answer 22

Supply positioning and can be used to judge the importance of products and segment purchases to use appropriate strategies

Measures:

Importance- e.g. using ABC

vs

Risk- e.g. risk management like STEEPLED

You can segment products in value order and do the importance vs risk and plot on the matrix to get a picture of the organisations procurement strategy

Question 23

How is risk identified and managed?

Answer 23

Can use STEEPLED

Monitored on a risk register

Identify
Assess
Control
Mitigate

Risk = probability x impact

Question 24

What is a call off contract?

Answer 24

An overarching agreement with regards to price and T&Cs that allows an organisation to order stock or services as required over a period of time.

Useful when volume over a period of time is unknown

Question 25

What are some drawbacks to the Kraljic matrix?

Answer 25

Markets are complex and not everything is easy to classify There is subjectivity involved in classification The analysis is only a snapshot as the environment will change It is applied to products/services specifically not necessarily the supplier Can be risks outside of the buyer/supplier relationship

Question 26

Why might a supplier not want to work with a buying organisation/ find the buyer an attractive proposition?

Answer 26

Unprofitability Knowledge from the industry e.g. late payments Large organisation who doesn't need the business/ at capacity

Question 27

Why might a supplier find a buying organisation attractive?

Answer 27

Profitable Good PR e.g. working for olympic games projects Growth opportunity Stability and predictability Reputation ESG and ethical practices Collaborative Low risk

Question 28

What is the supplier preferencing tool?

Answer 28

Also called the Steele and Court matrix and looks at how the supplier views the relationship with the buyer. It is limited by being a snapshot in time, non quantifiable and also from the buyers perspective Ranks from the suppliers perspective: Attractiveness of buyer vs Value of business Nuisance Development Core Exploitable

Question 29

What is the benefit to the buyer of being a preference of the supplier?

Answer 29

Top of allocation list for products/services in short supply Access to NPD Better collaboration on cost reduction

Question 30

What is the market management matrix?

Answer 30

This is a combination of the Kraljic and the steele and court matrix Gives a holistic view of supply positioning and supplier preferencing Benefits: - Further chance to evaluate relationships and where opportunity lies - Indicate where action needs to be taken - indicate where a change of relationship rather than a change of supplier might be required

Question 31

How could a buying organisation who is seen unfavourably (e.g. as a nuisance) in the suppler preference matrix become more important?

Answer 31

These would be resolved via Supplier Action Plans Increase the volume/value of the business (there are risks with single source) Involve the supplier in innovation and development programmes communicate with the supplier to understand why they may be considered a nuisance and what issues need to be prioritised to change that

Question 32

What are porters 5 forces? What is it used for?

Answer 32

Understanding the attractiveness of an industry and ultimately inform whether there is opportunity to make a profit in an industry Threat of substitution Competition New Entrants Power of Buyer Power of Supplier

Question 33

What is a monopoly, duopoly and oligopoly?

Answer 33

Monopoly is where there is only one supplier Duopoly is where there are two suppliers in the market Oligopoly is where the market is dominated by a few large suppliers

Question 34

Give information about monopolies

Answer 34

One large supplier in a market Buyers have to sole source (no choice but to use the 1 supplier) Example in the UK is water companies In the UK it is monitored closely by the competition commission to monitor this (think about Asda and Sainsburys) Suppliers have all the bargaining strength Patents can generate monopolies

Question 35

Give information about duopolies

Answer 35

2 suppliers in a market Can result in uncompetitiveness through unofficial commercial alliances Historically this would have been airbus and boeing before comac entered the market

Question 36

Give information about oligopolies

Answer 36

Where a few large suppliers dominate the market as cost of entering the market is large Examples are the oil industry Actions of one company can significantly affect the others Supplier power is still strong Governments have responded with controls to try and prevent price fixing and collusion

Question 37

What is imperfect competition?

Answer 37

There are a number of suppliers in the market, but they are not selling similar services or products reducing the amount of competition Each seller could therefore follow a differentiation strategy Monopoly and oligopoly are examples

Question 38

What is perfect competition?

Answer 38

Large number of suppliers selling identical products and services It is hypothetical where competition is at its greatest There is perfect market knowledge (all buyers have easy and instant access to prices) There are no barriers to entry All companies are price takers (do not influence prices charged) There is a cost to competing, e.g marketing costs Example is agricultural produce

Question 39

What is monopolistic competition?

Answer 39

Companies in the market offer similar products or services but not perfect substitutes Comapnies have the same low level of market power Prices are elastic (where when prices are lower demand is higher- normally occurs when there are a number of substitutes) Examples of this are restaurants, hair dressers, clothing, taxis Sits somewhere between monopoly and perfect competition

Question 40

What is oligopsony?

Answer 40

This is where there a few large BUYERS/CUSTOMERS dominating the market

Question 41

What is a monopsony?

Answer 41

Only one buyer in the marketplace which will have strong market power e.g. manufacturer of brain scanners that are only affordable to the NHS. However, now football teams have invested in brain scanners meaning it is becoming an oligopsony Example in america could be a very large supermarket like walmart

Question 42

What can affect rivalry between companies in a market?

Answer 42

Industry growth/decline Product differences/ brand identity Switching costs Diversity of competitors Exit costs

Question 43

What are barriers to entry?

Answer 43

This prevents the threat of new entrants, e.g. in oil and gas where barriers are too high Economies of scale Start up costs Licenses/permits High switching costs for existing customers Access to distribution networks Knowledge and skills Government policy (which may protect national industries)

Question 44

What will influence the threat of substitutes?

Answer 44

Linked to barriers to entry, if barriers are low there will be more players and more substitute options. Suppliers will want to defend against substitute threat, whereas buyers want more choice to drive competition (which increases quality and reduces cost) Relative price performance of substitutes (e.g. if an android phone is cheaper than Apple) Switching costs for buyers Trends e.g. fashion, technology Buyer propensity to substitute and risk

Question 45

What is power of suppliers and when is it strong?

Answer 45

Supplier power is at its strongest in a monopolistic market Example is an OEM as the buyer has no choice but to use them When supplier power is strong they have little or no reason to invest in building relationships with buyers Power is strong when: - Supplier can differentiate its offering - Switching costs for buyers is high - Lack of substitutes

Question 46

What is power of buyers and when is it strong?

Answer 46

When there is competition in the marketplace Where branded products do not need to be used The market is a monopsony Large purchase volume Large amount of information Threat of backward integration There are substitute products available

Question 47

What is backward, forward, vertical and horizontal integration?

Answer 47

Backward = buyer purchases supplier Forward = An organisation purchases a customer Vertical = When a buyer owns companies within its supply chains. Can be forward/ backward vertical integration Horizontal = Where an organisation buys or merges wit a competitor (usually to increase volume)

Question 48

What is the matrix used to assess buyer/supplier power

Answer 48

It ranks buyer power vs supplier power Independence = Bottom left Buyer dominance = top left Interdependence = top right Supplier dominance = bottom right

Question 49

What is STEEPLED used for?

Answer 49

This is to assess the factors that apply to a supply chain, and helps analyse any external influences and risks that could affect a company.

Question 50

What does STEEPLED stand for?

Answer 50

Social e.g. consumer tastes, trends, fashions Technological Economic Environmental Political Legislative Ethical Demographic e.g. ethnic mix, social class, gender, aging population

Question 51

What is a business cycle?

Answer 51

This is the rise and fall over time of output in an economy as measured by GDP (gross domestic product)

Question 52

What influences where a supplier relationship sits on the relationship spectrum?

Answer 52

Level of trust Level of openness (transparency + info sharing) Commitment Mitigating risks (who manages and mitigates) Frequency and quality of communication

Question 53

What is added value?

Answer 53

Non cash releasing benefits generated via procurement and SRM. Sometimes considered as something that you would otherwise pay extra for It can also be a justification for spending time and resources on building relationships with suppliers

Question 54

What is RORI?

Answer 54

Return on relationship investment- financial benefits for a buyer of establishing, developing and maintaining a supplier relationship

Question 55

Developing strong supplier relationships can support added value outcomes- procurement can support the delivery of a number of benefits, what examples could they be?

Answer 55

Cash savings/ cost avoidance e.g. by reducing waste Risk management Improved efficiency Improved ESG

Question 56

What is the value chain?

Answer 56

The coordinated processes, people and resources within an organisation which generates corporate value Porter developed the model with the support and primary activities

Question 57

What is PDCA?

Answer 57

Plan, do, check, act Used for continuous improvement cycles

Question 58

What is a value network?

Answer 58

Described as economic ecosystems- a set of connections between organisations interacting which benefit the whole group. Buyers and suppliers can work together to serve the needs/interests of the group.

Question 59

How can procurement add value?

Answer 59

Price/cost management Improving quality Timescales- e.g. lead times, reduced late deliveries, prevention of bottlenecks Quantities- Right quantity, storage, holding, etc Place of delivery ESG

Question 60

How can procurement add value to the pricing/cost management?

Answer 60

Specification development (making sure it is fit for purpose, not over specified) Run competitive tenders Review WLC not acquisition prices only use E-sourcing Negotiate- usually following the tender Contract management

Question 61

How can value be added through quality?

Answer 61

Improving costs that are needed for rework or faulty components Costs of downtime Poor quality products reaching the end customer

Question 62

What is the difference between quality control and quality assurance?

Answer 62

QC = developed first to control variation, used to control the quality of the output QA = Process of managing quality involving systems and processes e.g. spot checking or mystery shoppers

Question 63

Why would you add value through holding stock?

Answer 63

Ensures supply is available if something severe happens in the SC Can reduce lead times Discounts for bulk buying Safety against price fluctuations Better demand management HOWEVER There is a cost to storage Capital is tied up and you need the capital in the first place Risk of obsolescence Lost opportunity cost

Question 64

How can ESG negatively impact an organisation?

Answer 64

NEGATIVES: - Human rights issues in the SC - Irresponsible waste disposal - Unnecessary carbon emissions - Use of non renewable materials - Lack of equality and diversity - Bribery/corruption

Question 65

In addition to the 5 rights, procurement can add value through effective ESG, which ESG processes may add value?

Answer 65

Specification- including standards, packaging requirements, social value (positive local impact), T&Cs WLC- Particularly in relation to running costs, the longevity of the asset and end of life costs (disposal) Supplier selection and award- Code of conducts, ESG policy, code of ethics, labour policies, accreditations

Question 66

When is an RFP used?

Answer 66

When there is known competition in the market and the scope is well defined

Question 67

What is price elasaticity

Answer 67

A measure of change in demand for a product or service in relation to changes in its price if it is more elastic the more the price goes down the more demand increases. There tends to need to be a lot of substitutes for the price to be elastic

Question 68

What is forward, backward, vertical and horizontal integration?

Answer 68

Forward is where the supplier buys the retailer/customer Backward is where the buyer purchases the supplier Vertical is where an organisation owns multiple companies in the supply chain Horizontal is where there is a merger with a competitor

Question 69

In what ways could you add value from a cost/price perspective?

Answer 69

Reduce costs Mitigate a CPI Get more for the same amount Amend terms e.g. move from 30 to 60 days payment to improve your cash flow Reviewing that there is not overspecification Running effective tendering Negotiation Contract management

Question 70

Give examples of documents that procurement professionals could request to assess a suppliers ESG credentials

Answer 70

Code of conduct Code of ethics Labour policies Accreditations e.g. Fairtrade international