Advanced Diploma in Purchasing and Supply. Risk Management and Supply Chain Vulnerability L5-02 LEVEL 5. Senior Assessor s Report

Transcription

1 Advanced Diploma in Purchasing and Supply Risk Management and Supply Chain Vulnerability L5-02 LEVEL 5 Senior Assessor s Report May 2007

2 INFORMATION FOR CANDIDATES The senior assessor s report is written in order to provide candidates with feedback relating to the examination. It is designed as a tool for candidates both those who have sat the examination and those who wish to use as part of their revision for future examinations. Candidates are advised to refer to the Examination Techniques Guide (see the following link as well as this senior assessor s report. The senior assessor s report aims to provide the following information: An indication of how to approach the examination question An indication of the points the answer should include and how marks are allocated An indication of candidate performance for the examination question APPENDIX A syllabus matrix for the examination is included as an appendix. It highlights the learning objectives of the syllabus unit content that each question is testing. The unit content guides are available to download at the following link: ADDITIONAL SOURCES OF INFORMATION The Supply Management magazine is a useful source of information and candidates are advised to include it in their reading during their study. Please see the following link to the Supply Management website L5-02 May07/SA Report/FV 2

3 SECTION A Q1 (a) Q1 (b) As a member of Goldstar s management team you have been asked to analyse Horizon s profile shown in Fig 1. Prepare an informal report of your findings on how Horizon s capability and performance profile compares with the industry benchmarked average. Explain the relevance of FIVE of the 15 listed assessment selection criteria, shown in Fig 1, in determining the suitability of Horizon as a specialist contractor for Goldstar. (10 marks) (15 marks) Analysis of the Question Part (a) of this question sought to test the candidates ability to analyse key criteria against the capability and performance profile of a prospective supplier as benchmarked against peer companies, in terms of risk management processes, policies and procedures that it has in place. Additionally, the candidates competence in report writing was also being tested. Part (b) of this question sought to test the candidates knowledge and understanding of key supplier selection, and appraisal criteria, in terms of what level is necessary to limit risk exposure for all parties to a contract. Analysis of the Answer Part (a) Key discussion areas were: Horizon has a good overall capability profile when compared with its industry contractor peer group. Horizon s profile indicates good policies & procedures with regard to: Health & Safety, Environmental, Ethics, Corporate social responsibility and Quality Management. In terms of benchmarking, Horizon is slightly ahead of its peer group in terms of good feedback received from clients on actual contract performance. Service quality and deal terms on offer from Horizon also appear to be good and from the case study background it should be noted that Horizon is prepared to contract on a guaranteed lump sum turnkey basis, which gives a degree of certainty as to final out-turn cost for Goldstar, particularly if adverse weather conditions prevail during offshore operations or if there are operational problems. Horizon also has capacity in terms of vessel availability and resources at this time. Financially the company is sound with a good credit rating, so there should be suitable security of performance. Appropriate insurances are in place to back up liability and indemnities given by Horizon. Customer interface management and contingency planning also appear sound. A potential area of weakness might be Horizon s management of subcontractors and suppliers and also the monitoring and audit systems that it has in place; however, they are still considered adequate. Overall therefore, Goldstar should have no major concerns about contracting with Horizon based on the evidence from the internet database. L5-02 May07/SA Report/FV 3

4 Better answers compared Horizon with its industry peer group, making observations through analysis of the Gantt chart. Additional marks were available for answering in report format. For part (b) a brief description of the following criteria was indicated: Service quality - reliability of survey vessels and drilling rigs (no non-productive downtime and so on.) A risk mitigating feature. Deal terms - that are market competitive and maybe even discounted, if more work is guaranteed under a longer term arrangement. Gives more certainty of final out turn cost in terms of financial risk (Different with reimbursable day rate deals). Financial capability - company accounts will show gearing/financial ratios and so on, plus credit rating will indicate the financial stability of the company. This is a key risk as Goldstar doesn t want to contract with a company that is financially distressed and not capable of fulfilling its contractual obligations. Health, Safety and Environmental policies - are crucial to working in the offshore energy sector. Minimising the risk to people and the environment are paramount. Contingency planning - is essential (such as in the event that a seismic vessel or drill rig were to break down) could Horizon get access to an equal and approved replacement at no extra cost to Goldstar? Ethical policy and corporate social responsibility - are Horizon ethical in the way they go about their business? And have they regard to CSR in terms of treatment of people, cultural issues and so on? Goldstar must ensure that their key suppliers are aligned to the way that they do their business. Insurances - are needed to back up the liability and indemnity contractual provisions which Horizon will take on under the contract with Goldstar. Customer interfaces - good communication via contractor account representative is essential. Sub-contract management - also does Horizon have good, reliable sub-contract arrangements in place? Goldstar needs to understand Horizon s supply chain and also any commitments it has with other clients to ensure that resource and vessels are available when required. Quality management, monitoring and audit systems - are essential to ensure that acceptable standards are maintained and procedures are in place to identify problems quickly and take the necessary corrective action. Technology/ Equipment/Vessels - must be safe and fit for purpose, in accordance with accepted industry standards. Stronger answers expanded by collective observation of Horizon s capability and performance profile for the aforementioned criteria (as benchmarked against its industry peer group) and how this enables Goldstar to form an opinion regarding Horizon s suitability to appoint as a key supplier/service provider. Feedback from other clients onto the Internet database creates a track-record profile which, whilst not a guarantee as to future performance, is nonetheless a good indicator. L5-02 May07/SA Report/FV 4

5 Exam Question Summary Question 1 Part (a) Candidates mostly identified areas were Horizon was performing well and not performing so well. Many, however, failed to relate their answers to the wider picture and Horizon against the industry benchmark. Question 1 Part (b) This part of the question was generally answered very well, although a number of candidates did not expand on their answers sufficiently Q2 (a) Q2 (b) Evaluate the benefits and risks for Goldstar of entering into a long term alliance relationship with Horizon. Your answer should include reference to Fig 2 Discuss contingency planning considerations for Goldstar when entering into a long-term alliance relationship with Horizon. (15 marks) (10 marks) Analysis of the Question Part (a) of this question sough to test the candidates understanding of the benefits and risks of entering into long-term contractual arrangements with a single service provider, or supplier, in the context of supply-chain vulnerability Part (b) of this question sought to test the candidates awareness of contingency planning. Analysis of the Answer For part (a) the answer centred around acknowledgement that the market is tight for specialist seismic survey and drill rig hire companies, who are in short supply. As a consequence, it would probably be the right strategy for Goldstar to pursue to try and establish a longer term contractual arrangement with Horizon. Also consideration of what features require to be present in a potential client/supplier relationship to warrant the development of a longer term type alliance arrangement. Usually these require critical reliance on the supplier and high spend, both of which are present in this case. Before a choice of longer term contracting party is made, there is usually a rigorous selection process, the contract has to be medium to long tem (say 3-5 years) and possibly include a performance/incentivisation element. L5-02 May07/SA Report/FV 5

6 Longer term alliance contractual arrangements with single organisations can bring many benefits; however, it should also be acknowledged that whilst this may be true, they can also carry specific risks. Some of the key benefits to Horizon could include: Preferential price terms with more certainty over final out-turn cost for each survey/drill (for example, lump sum price, rather than reimbursable) in exchange for exclusivity of contract work for Goldstar). Establishment of a good working relationship, where the drivers of both organisations are neatly aligned in terms of key performance indicators. Continuous improvement through joint alliance improvement teams and so on. Less tied-up working capital Greater flexibility to vary the service Reliance on the specialist contractor s expertise Access to innovation and fit for purpose survey/drilling vessels. Development of risk/reward type incentivisation mechanisms. Some of the main risks might be things such as: Over-reliance on the Horizon as an essential outsourced contractor and related internal complacency. Consider where Goldstar would be if they got into contractual disagreement with Horizon or if Horizon were to suddenly be unable to meet their obligations. Less leverage and management control Contractual tie-in and inflexibility Loss of internal skills and expertise. When contracting over the longer term with a single company, for such a crucial element of the business, Goldstar needs to take due consideration of the combined benefits and risks of such an approach. On balance, however, in this case it seems the right strategy to follow given market factors. Better answers demonstrated a broad awareness of the rationale behind formation of longer term alliances with reference to Kraljic s matrix. For part (b) acknowledgment was sought that Goldstar needed to consider contingency planning, in the event that Horizon was unable to perform its obligations. Perhaps an arrangement with Horizon as primary supplier but also having a secondary back up supplier, and a discussion as to how this would work in practice. Additionally, a comprehensive consideration of peripheral contingency planning measures was indicated. Better answers demonstrated a broad awareness of the rationale behind formation of longer term alliances but with the need to always have a fall-back arrangement. Exam Question Summary Question 2 Part (a) L5-02 May07/SA Report/FV 6

7 Most candidates identified benefits and risks. Better answers provided a wider range of benefits and risks while weaker answers tended to focus on a smaller number of benefits and risks Question 2 Part (b) Many candidates failed to answer this question in the context of a long-term alliance and discussed contingency planning more generally. Stronger answers made reference to alternative sources of supply, dual sourcing and standby suppliers SECTION B Q3 (a) Q3 (b) Define the term risk in the context of project management and provide an appropriate example to illustrate your definition. Discuss the considerations necessary before the choice of contract type and overall procurement route is made. (10 marks) (15 marks) Analysis of the Question Part (a) of this question sought to test the candidates knowledge and understanding of what Risk is, by way of a definition, and also giving examples, and explaining the concept of transferring risk to other parties. Part (b) of this question sought to test the candidates knowledge of considerations that are necessary at the outset, before the choice of contract type and overall procurement route are made. Analysis of the Answer For part (a) a definition of risk along the lines of: The chance or possibility of loss or bad consequence associated with a project. There are many examples of Potential loss or bad consequence which candidates could give (such as the prospect of cost exceeding the estimate upon which the viability of the work or project commitment by the client was based). In the clients eyes this would be a bad outcome for his project. Stronger answers recognised that risk associated with potential loss or vulnerability might be mitigated at outset through transference (for example, as part of early plans at inception/planning stage for the execution of a project). A prudent client would review all of the uncertainties and supply chain vulnerabilities related to the project, and would seek to remove them, or at least reduce them, by contracting with other organisations to execute the work either in whole or in part. This is done on a basis which transfers elements of risk to the Contractor(s)/Supplier(s) involved. Normal practice is for this to L5-02 May07/SA Report/FV 7

8 be achieved by selecting a suitable procurement approach and remuneration or pricing regime to guard against risk and financial loss by avoiding common contractual pitfalls. For part (b) in selecting the type of contract and procurement approach to be used a number of factors need to be considered at outset. They include, but are not necessarily limited to: The likely value of the overall project/budget parameters. Market parameters availability and capacity of Contractors/Suppliers. Complexity and type of project work being undertaken. Responsibility for design, if applicable (and any associated technical risk). Limitation of risk associated with the basis for remuneration. The time. A complete understanding of the supply chain that will be involved in undertaking the project and the related interdependencies. Understand key drivers, performance indicators and strategic objectives. Existing contract arrangements (such as call upon existing framework agreements). Safety, Health and Environmental considerations. Legislative considerations. Required competence/skills/level of quality and standards required. Generation of well thought-out work scope. Better answers identified a broad range factors. Exam Question Summary Part (a) Most candidates defined risk well, however a number failed to relate risk to project management and particular vulnerability and the need for good planning from the start. Part (b) Although there was a minor printing error in the wording of this question a number of candidates misread this question and just discussed the types of contracts available. Better answers did concentrate on pre-contractual issues although some candidates had a tendency to produce answers that lacked depth and focus on just a few topics. The marking team were instructed by the SA to make appropriate allowances where candidates clarified the basis of their answer vis-à-vis the printing error. Q4 (a) Q4 (b) Explain the components of a risk register and suggest how they might be monitored and reviewed. Explain the link between decision quality and risk reduction in terms of a successful project outcome. (10 marks) (15 marks) L5-02 May07/SA Report/FV 8

9 Analysis of the Question Part (a) of this question sought to test candidates knowledge of a risk register, and its constituent components, and also basic understanding of how a risk register is established, involving the engagement of key organisational stakeholders and then subsequent monitoring. Part (b) of this question sought to test candidates understanding of project failure, its causes and its implications and also the link between project outcome and up-front decision quality, and effective project planning, to ensure value realisation. Analysis of the Answer For part (a) the risk register must be defined by the constituent component parts listed (such as Item reference, Description, Date identified, Date last reviewed, Owner, Description of potential impact, Likelihood of impact, Classification of risk, Potential mitigating actions, Date of next review) In developing a risk register it is essential to engage all key stakeholders throughout the organisation, or involved in the project, to get their input and thoughts on what should be included. Risk registers, therefore, need to be established at project inception, as part of the project initiation by the project team - involving a review of all areas of the project and likely areas of hazard/disruption/risk. Risk registers also need to be logged by the project manager and regularly reviewed. Risk registers should also be kept as separate project document, accessible by all members of project team. Each risk identified should be attributed to an owner whose responsibility it is to monitor the risk and update the register accordingly. Regular reporting on the contents of the risk register is important as part of monitoring, review and escalation. Better answers imparted the need to engage all key stakeholders in preparing a risk register, thereby increasing subsequent buy-in. Part (b) An explanation of the link between decision quality and risk reduction/project outcome was indicated. Mention should be made of the key dimensions associated with a project namely: the decision making quality on the project and the execution of the project. If a project team only performs one of those two dimensions well (either decision making or execution), the project is less likely to provide a successful business outcome. If, however, the opportunity is selected well, and executed with excellence, the probability of business success increases dramatically. Projects can fail through a variety of means also, for example.: Due to not meeting deliver objectives/targets Due to delay and overruns on deadlines Falling outside of budget L5-02 May07/SA Report/FV 9

10 Disruption external events and cannot be completed. Better answers identified early factors contributing to good project outcome vs. those that would result in a poor project outcome Exam Question Summary Question 4 Part (a) Candidates generally answered this question well although better answers did discuss management responsibility and ownership. Weaker answers just discussed the components of a risk register. Question 4 Part (b) This part of the question was quite poorly answered in general, with many candidates failing to give examples of where projects fail, and not relating early decision quality to the final project outcome Q5) Distinguish some of the typical areas of risk taken on by a contractor, which could impact directly or indirectly on their client, and discuss how they can be minimised from the client s perspective. (25 marks) Analysis of the Question This question sought to test the candidates knowledge and understanding of risks that are assumed by contractors/suppliers in undertaking projects. In the event that losses occur for the contractor/supplier, then there may be direct or indirect consequences for the client. Analysis of the Answer Many areas of capture could have been used to answer this question as listed below: Errors in pricing at tender negotiation stage. Escalation of labour rates. Escalation of insurance costs. Sub-contractor/supplier failing to perform impacting on main contract arrangement. Unable to meet performance targets agreed with client. Underestimate of compliance with QA, QC and Health, Safety and Environmental parameters. Material supply and price difficulties. L5-02 May07/SA Report/FV 10

11 Plant and equipment breakdown/maintenance/renewal. Misunderstanding of contract obligations and responsibilities. Fluctuations in interest rates and currency exchange and so on. Changes in employment legislation. Weather conditions. Wastage and Theft. Ability to retain the necessary level and quality of resource during competitive periods. Stronger answers built on the list by discussing how from the client s perspective, the contractor/supplier risk items listed are normally minimised by means of the incorporation of a sound contractual/commercial preamble into contracts which clearly spell out what degree of risk is Deemed to be included within Contractors tendered rates, sums & prices. Good answers here should also recognise that the aforementioned risks may fall into the category of being either within or outwith the contractor s/supplier s control, consequently, in carving out the final contract documentation for execution - both parties to a contract need to be guarded against such pitfalls, and ensure it reflects the agreed delineation of performance responsibilities, and risk allocation to avoid potential financial loss. Exam Question Summary Question 5 For a relatively straightforward question many candidates failed to explain how risks could be minimised, and again there was a tendency, in some cases, to produce answers that lacked breadth and depth, in terms of coverage of subject matter. Answers often only discussed two or three areas of risk assumed by a contractor. Q6 (a) Q6 (b) Summarise the key elements of an internal audit of a purchasing function within an organisation, with particular emphasis on control and identifying potential issues of supplyrelated fraud. Explain how an organisation should establish and manage an external benchmarking exercise of its own internal audit process. (13 marks) (12 marks) Analysis of the Question Part (a) This part of the question sought to test the candidates knowledge of terms of reference that would be suitable for conducting an internal audit of a purchasing function within an organisation, with particular emphasis on control, and identifying potential issues of supply related fraud. Part (b) This part of the question sought to examine the candidates ability to establish and manage an external benchmarking exercise to assess and mitigate risk. L5-02 May07/SA Report/FV 11

12 Analysis of the Answer Part (a) sought a brief description of what an internal purchasing audit is - reference to it being a formal process of enquiry within an organisation, with the purpose to identify and/or review specific areas of a purchasing function (including related management activity). Ensuring no actual or potential for fraud. Supply-related fraud could include but not necessarily be limited to: bribery and/or extortion theft and/or money laundering buyer or supplier misrepresentation failure to comply with specifically prescribed policies and procedure unethical internal purchasing practices unethical practices by a supplier or prospective supplier. collusion between suppliers. corruption. Reference to CIPS or equivalent standards of ethical and professional practice which contains provisions covering this topic. Terms of reference for an internal purchasing audit should include, but not necessarily be limited to: stated objectives and purpose clearly defined scope likely timescales for investigation persons authorised to make investigations (and by whom) method of proposed investigations proposed method of reporting findings how recommendations for any follow-up action will be agreed Better answers more broadly captured and explained the above points. Exam Question Summary Question 6 Part (a) Many candidates failed to explain what an internal audit is and in some cases completely failed to answer the question being asked. Better answers did give examples of supplier related fraud. In a large number of cases there was no discussion of what the internal audit should contain and very few candidates mentioned areas such as follow-up actions and methods of reporting findings. Question 6 Part (b) Better answers generally did discuss the different types of benchmarking and recognised L5-02 May07/SA Report/FV 12

13 the areas that needed to be discussed as part of a benchmarking exercise. Weaker answers did not focus on the steps to follow in a benchmarking exercise or only covered a few points. General observations Some candidates did not practise effective time management in terms of answering the paper in its entirety. Often, too long was spent on early questions, resulting in candidates running out of time to complete or undertake later questions. Some candidates did not write about the specifics of the question, instead choosing to write about what they generally knew about the topic. There was also evidence of repetition of answers on topics such as risk across almost all of the questions. These two areas suggest that some candidates did not study the question properly. Some candidates were able to demonstrate 'higher' levels of appropriate knowledge, resulting in corresponding higher marks than the majority at distinction level. Most candidates, however, passed at normal pass level and (less of them) at credit pass level. There was fails across most examination centres, albeit these were not in significant numbers. APPENDIX The matrix indicating the learning objectives of the syllabus unit content that each of the questions in the paper tested is summarised in the following table: L5-02 May07/SA Report/FV 13

14 Question number 1. Understanding the nature of risk in purchasing and supply L5-02 RISK MANAGEMENT AND SUPPLY CHAIN VULNERABILITY Goldstar Energy SECTION A SECTION B a). b). a). b). a). b). a). b). a). b). 1.1 x x 1.2 x x 1.3 x x x 1.6 x x x x x 2. Risk management processes and structures 2.1 x 2.2 x x x 2.3 x x 2.4 x x x x 3. Managing risk and supply chain vulnerability 3.1 x x x x 3.2 x 3.3 x 3.4 x x x REPORT WRITING FORMAT x L5-02 May07/SA Report/FV 14