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

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1 Advanced Diploma in Purchasing and Supply Risk Management and Supply Chain Vulnerability L5-02 LEVEL 5 Senior Assessor s Report November 2009

2 SECTION A Q1 Evaluate the issues which could influence how EGN develops a CSR policy for managing risk and vulnerability in its complex international supply chain. The mandatory question sought to test the candidates ability to evaluate issues from a case study which could influence how an organisation develops a CSR policy for managing risk and vulnerability in a complex international supply chain in an ethical and professional way. (Syllabus references: 1.7, 2.1 & 3.1 apply) Candidates were expected to give an outline description of what CSR means in the context of Ethical Gemstones business environment - making reference to CSR being a wide ranging agenda and involving looking at how to improve the company s social, environmental and local economic impact, its influence on society, social cohesion & human rights. What was indicated was recognition of the importance for Ethical Gemstones to develop a CSR policy covering its highly visible operations in the global diamond industry. Such a policy must demonstrate organisational capability and have plans, procedures and the necessary corporate infrastructure to deal with issues such as: Responsible behaviour of its management and employees and lack of integrity of suppliers across the supply chain. Health, Safety & Environment - duty of care to workforce across Ethical Gemstones operations and also to the wider local communities Control measures around conflict diamonds offering reassurance that products meet the required ethical standards. Better answers will recognise that irresponsible behaviors and poor company procedures can ultimately result in a high cost to the company (e.g. bankruptcy, loss of shareholder value, criminal and or civil prosecutions, loss of credit rating and of course loss of reputation and confidence in the company). This mandatory question was generally reasonably well answered by most candidates although some missed the opportunity to define CSR at outset which was surprising. Some candidates unfortunately did not fully evaluate the issues without being repetitive making observations and descriptions rather than analysis. Some candidates opted to impart their knowledge of how to apply an overall risk management methodology rather than responding to the specifics of the question in the context of vulnerability. Some good answers discussed in detail the loss of reputation and the ten transitions. L5-02/SA report/nov 2009/N. McLennan 2

3 Q2 Recommend and justify appropriate measures for EGN to ensure its CSR policy is complied with by its suppliers, thereby reducing risk and vulnerability. The question sought to test application of knowledge of the steps or measures an organisation could take to ensure its CSR policy, once developed, is complied with by all its key suppliers thereby reducing risk and vulnerability. (Syllabus references 2.2 & 3.1 apply) Candidates were expected to recognise that Ethical Gemstone s CSR policy must also be interested in the manner in which its potential or existing supply chain approaches corporate governance and ethical issues as it might well impact back on Ethical Gemstones there is CSR failure down its supply chain. Candidates should have captured possible steps or measures that could be taken such as: contractual obligations on suppliers to adopt complementary CSR practices, development of Key KPI s, auditing, appropriate PR considerations, introduction of an ethical code of practice for Ethical Gemstone s supply chain and renegotiation of existing supplier arrangements to ensure compliance. Better answers will discuss why these supplier control measures will help reduce risk and vulnerability and why it is important to consider to CSR alignment when selection / sourcing suppliers at outset. Answers to this mandatory question revealed that most candidates were able to demonstrate the basic approaches to compliance - visits, audits, etc., but some were weak and lacked detail on the overall policy deployment across the supply network, and/or how to tie in compliance with KPIs. Additionally, some candidates missed the opportunity to say "why" this was important and to make full use of the information provided in the case study to demonstrate the development of a CSR policy Overall though - most candidates were able to give a sufficiently good answer to achieve a pass. Better answers choose to discuss the international supply chain, training, developing relationships and ensuring CSR policy was implemented at the start. More marls would have been achievable had answers done this rather than tending to focus on auditing and risk strategies like the 4Ts rather than compliance. L5-02/SA report/nov 2009/N. McLennan 3

4 SECTION B Q3 Outline the term risk appetite and explain its relevance in assessing the influence and power of different stakeholders in an organisation. The question sought to test knowledge and understanding of risk appetite and its relevance in assessing the influence and power of different stakeholders to an organisation. (Syllabus references: 1.1 & 1.6 apply) Candidates were expected to be able to explain risk appetite as being the propensity of an organisation or individual to accept a certain amount of risk. Risk appetite usually has a basis in the culture of the organisation dealing with the risk. Risk aversion refers to the attitude that we should minimise the taking of risk and the possibilities of loss, whilst risk enthusiasm recognises risks and evaluates them with an eye to the opportunities which may be presented. These concepts are important when assessing the influence and power of different stakeholders to an organisation and in this regard - candidates would be expected to expand their answers to cover stakeholder analysis in the context of a stakeholder analysis matrix capturing influence and impact. This was a very popular optional question which was usually reasonably well answered. Most candidates gave an acceptable description/definition of the term risk appetite. Some used the power/influence grid whilst others described it without using the grid and were given credit for doing so even if no diagram was included. The scope and clarity of the descriptions of external and internal stakeholders varied significantly - clearly some candidates had a better understanding of the role and influence of stakeholders. Better answers to this question were able to give examples of internal and external stakeholders and their relative influence and impact on risk decision quality. More marls would have been achievable had candidates more clearly related their answers to stakeholder mapping using an appropriate model or matrix. Weaker answers tended to focus too much on risk appetite or risk aversion. L5-02/SA report/nov 2009/N. McLennan 4

5 Q4 (a) Define what is meant by supply chain vulnerability. (5 marks) Q4 (b) Discuss how organisations may take a different approach to purchasing in a critical bottleneck market as opposed to a leveraged acquisition market. (20 marks) Part a) of this question sought to test candidates understanding of the term Supply chain vulnerability (Syllabus reference 1.4 applies) Part b) of this question sought to test candidates knowledge of taking different approaches to purchasing from a critical or bottle-neck market as opposed to a leveraged or acquisition market. Again, syllabus reference 1.4 applies). For part (a) What was indicated was a discussion around the supply chain being a network of interdependent organisations with processes and data moving in many different directions between many of the participating processes and players. The payers involved will have certain reliances on others and it is when these break down or are at risk then we can say that there is a supply chain vulnerability. Better answers will give examples of vulnerabilities that they have observed within critical supplier networks. For part (b) Candidates were expected to discuss the use of an adapted Kraljic matrix to demonstrate categorisation between bottleneck/critical and leveraged positions. The discussion should capture risk/citicality and spend- recognising the categories of: High value strategic impact (Strategic criticality), High dependency bottleneck (Strategic security), Routine items and Important leverage items. Candidates were also expected to capture the approaches which are relevant under each these categorisations. For example possible approaches being: Rigorous selection of supplier - medium/long term contracts clear work scope devised, performance driven, incentive based & ensure value gain; Long term contracts - clear work scope devised, strong relationships & ensure value gain, high performance required; Simple relationship- very competitive, easily changed out - delivery & non conformance measures; Short to medium term contracts - uncomplicated relationships / competitive This was a popular optional question but with a wide variation in quality of answers from candidates. L5-02/SA report/nov 2009/N. McLennan 5

6 For Part (a) Most candidates gave a good description/explanation of the term supply chain vulnerability. Better answers were supported by the use of examples. For part (b) Answers were varied, albeit that the majority of candidates achieved a pass grade. There was a wide variation of versions of the Kraljic model drawn and described by candidates, with different axis labels and different proposals for how the quadrants might best be managed. This is perhaps reflective of the many different variations and adaptations of the model, the axis labels and the intepretations in different published learning texts. Most candidates managed to identify the different organisational requirements when dealing leverage suppliers and bottleneck suppliers. Better answers captured the criticality of the supplies, relationship development and the fact that leverage suppliers are often in highly competitive markets. Q5 Compare and contrast FIVE different types of insurance as a means of protecting an organisation against exposure to risk and uncertainty. This question sought to test the ability to compare and contrast FIVE different types of insurance as a means or protecting an organisation against exposure to risk and uncertainty. (Syllabus reference 2.7 applies). What was indicted here was a brief outline of five typical types of insurance or insurances to protect against risk and uncertainty. For example insurances such as: Suppliers/ Contractors all risk insurance, Employers liability insurance, Public liability insurance, Professional indemnity insurance, Third party risks Insurance, Insurance against damage, and Self insurance. Better answers will see candidates building on their lists / outlines of insurances comparing and contrasting what type of risks they are dealing with and also covering perhaps the decision to self insure as an alternative and how that reflects the specific risk appetite of an organization and perceptions of external factors occurring which might be out with that organizations control Surprisingly, this optional question was not so popular (only about 1 in 5 candidates answering). It was generally well answered although there were occasionally examples of candidates choosing to answer this question who clearly did not have a clear understanding of the different types of insurance and who consequently did not gain the pass mark. It should have been possible for candidates to generate relatively easy marks but many candidates tended to ignore evaluation, comparison, and analysis and those who did L5-02/SA report/nov 2009/N. McLennan 6

7 tended to focus on captive and self insurance for comparisons at the expense of other insurance types. Most candidates were able to identify five different types of insurance although in many cases the answers lacked explanation. Q6 Discuss measures that could be taken to protect an organisation if one of its key suppliers is rumored to be in financial difficulties. This question sought to examine knowledge and understanding of measures to safeguard your company if one of its key suppliers is rumoured to be in financial difficulties. (Syllabus reference 3.4 applies). Candidates were expected to first of all recognise the need to apply discretion to establish if indeed the key supplier is actually in financial difficulties (may in fact be no substance to the rumours - therefore establish facts! If the rumours are substantiated, then initial thoughts might turn to offering supportive business measures to ensure that your own supplies from that company are met and that ownership and title to any goods to be supplied vest with your company (if payment has been made). This can be dealt with by pre-assignment legal documentation. Other considerations might be: Ensuring contingency measures for a back up supplier, Calling in any performance bonds or guarantees in place with the supplier or other contractual measure to secure performance, Review any insurances in place to protect your company in the event of supplier default, Payment only on delivery of items, Ownership of materials off site (not yet delivered to you but which have been paid for already!) Better answers will consider the broader picture to validate accuracy of rumours and not necessarily default to defensive and/or contractual measures, but nonetheless ensure they are available if needed. This optional question was very popular and generally well or adequately answered, with safeguards often similar to those shown in the mark scheme, although candidates often missed out the step of checking at outset whether the rumours were true. Many candidates were able to identify finding alternative suppliers and engaging with the supplier to improve payment terms. It was pleasing to note that some answers identified the need to increase stock levels in the short term and even re-engineering the product or considering whether it could be eliminated altogether. More marks would have been achievable had candidates discussed a number of other alternative solutions as opposed to narrow focus. L5-02/SA report/nov 2009/N. McLennan 7

8 General observations Some candidates: Did not practice 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. 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 across several questions. These two areas suggest that some candidates did not study the question properly. Were able to demonstrate 'higher' levels of appropriate knowledge resulting in corresponding higher marks. Most candidates passed at normal pass level and (less of them) at credit pass level. There were also some distinction passes which was pleasing to see. There were fails across most examination centres albeit that these were not in significant numbers. Overall, the paper and responses to it were at an acceptable level for this core unit. APPENDIX The matrix indicating the learning objectives of the new revised unit content for L5-02 that each of the questions in the paper tested is summarised in the attached appendix table. L5-02/SA report/nov 2009/N. McLennan 8

9 APPENDIX The following matrix summarises the learning objectives of the syllabus unit content that each of the questions in the paper tested. SECTION A SECTION B Question No Learning a b a b a b a b a b a b Objective 1 Understanding the nature of risk in purchasing and supply 1.1 X X X X 1.7 X Risk management processes and structures 2.1 X 2.2 X X Managing risk and vulnerability 3.1 X X X L5-02/SA report/nov 2009/N. McLennan 9