CIPS Exam Report for Learner Community:

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1 CIPS Exam Report for Learner Community: Qualification: Diploma in procurement and supply Unit: D3 - Sourcing in P&S Exam series: January 2016 Question 1 Learning Outcome 1 a) Explain the term supplier tiering in the context of the case study. b) ESA has three prime contractors, Airbus, Thales Alenia Space and OHB. Below these first tier suppliers are lower tier suppliers, who are specialists in engines and flight systems. Outline THREE benefits for ESA s procurement function of adopting a supplier tiering approach to sourcing. (8 marks) (12 marks) The question expected the candidates to demonstrate their understanding of supplier tiering by a) explaining it in the context of the case study, and b) providing three of its benefits. a) The answer content might include: Explaining supplier tiering within the broad context of supplier base/supply chain management, a diagram might be useful. In terms of the case study, ESA is a big organisation with a large number of suppliers. It prefers to deal directly with only a small number of these suppliers, these are first tier suppliers. These tier1 suppliers are given the responsibility of dealing with and managing the other suppliers, the second tier suppliers. ESA may have a supply chain with thousands of different suppliers in many different countries. Rather than dealing directly with all of these, it might reduce its vendor base to a few hundred first tier suppliers, who in turn will deal with and manage a second tier and potentially third tier or further tiers of suppliers along the supply chain. Up to 4 marks were allocated for a correct explanation of the term 'supplier tiering' and up to another 4 marks for relevance and linkage to the case study. There was sufficient material in the case study to apply to the answer and strong candidates took advantage of it. Many candidates gained credit level marks, a large number providing useful illustrative diagrams to demonstrate their knowledge. However some candidates missed the opportunity to score higher marks as they did not present sufficient depth/breadth. b) Benefits of supplier tiering might include: There will be fewer commercial relationships to source and manage and develop instead of having to deal with a large number of suppliers. JANUARY 16_D3_EXAM REPORT _LEARNER_COMMUNITY_FV 1/7

2 To maintain quality, service and minimise business and reputational risk. However, ESA s procurement should 'drill down' through the tiers - appraising and monitoring policies, systems and performance thus ensuring sound management of the entire supply chain. ESA may influence first tier suppliers to adopt some of its own suppliers as subcontractors or lower tier suppliers. This will ensure continuity of its own business relationships established in previous contracts where such suppliers demonstrated excellence. ESA's procurement function will have fewer tasks and have time to pursue a more strategic focus on issues like sustainable sourcing, global sourcing, relationship development, etc. Collaborative partnership with tier 1 suppliers will enable ESA to benefit from their expertise and innovation which is important in ESA s kind of enterprise It may lead to variety reduction and standardisation of parts and components. This will result in cost savings in handling and storage. Up to 2 marks were allocated for the identification and brief discussion of each of THREE benefits and 2 marks each for application to the case study context. This question was generally well answered with many candidates gaining credit or higher marks depending on the detail provided. Question 2 Learning Outcome 2 Discuss FOUR appropriate selection criteria that ESA might use to assess potential new suppliers in order to increase competition. (20 marks) The question tested the candidates knowledge of the supplier selection criteria by discussing any FOUR in the context of the case study. The supplier selection criteria might include:- Financial capabilities and stability- the supplier's profitability, cash flow and cost structure -to establish whether the supplier is able to fulfil the contract. This is particularly important for ESA s long term nature of the contracts. Technical capability - establishing whether the supplier has the expertise, technology and right equipment to produce the required inputs or services. ESA will also consider areas such as innovation, design, JIT supply, potential for late customisation, tec. ESA s business requires inputs which are technologically advanced. Production capacity- this refers to the volume of business that the supplier is capable of handling. ESA will consider the existing production capacity (facilities, manpower, logistics, etc.) current commitment and potential for future increase. ESA s inputs are typically large capacity and timely delivery is critical. Systems capabilities whether the supplier has compatible systems and procedures or has the ability and willingness to adapt. ESA might consider the supplier's state of IT and the potential for JANUARY 16_D3_EXAM REPORT _LEARNER_COMMUNITY_FV 2/7

3 integration which is essential for long term collaborative relationship. Quality and quality assurance- the supplier s ability to meet ESA's specifications. ESA might review the supplier s quality culture, systems and procedures (QA, QC, TQM, QMS) to ensure that the supplier is qualified (e.g. ISO9000 certified) and can meet the standards required in space exploration industry. Environmental and sustainability consideration this might include the use of environmentally friendly materials and packaging, having recycling policies and certification such as ISO The supplier s location will have 'carbon footprint' implications which need evaluating against the potential suppliers located in 20 member states. ESA is a large organisation which is expected to be a responsible citizen. CSR, ethical criteria and labour standards- considering whether the supplier has robust CSR policy and ethical code of conduct. ESA might verify the supplier s compliance with ILO standards on worker rights, equality, diversity, etc. These factors have the potential to impact ESA s reputation. The culture of the supplier's organisation might involve supplier attitude toward innovation, creativity, customer service, etc. This is important to ESA s policy toward developing long term collaborative relationships with suppliers. Other: - Price and cost factors (this consideration might relate to- total acquisition/ownership cost, cost/pricing methods) e.g. ESA might want to engage suppliers willing to share information and mitigate the financial burden in these costly space exploration projects; Some candidates might also present their answers based on approaches such as FACE2FACE and Ray Carter s 10Cs. Up to 3 marks each were allocated for identification and brief explanation and 2 marks for application to the case study. There was good performance in this question with most candidates gaining credit or higher marks. Weaker answers tended to lack depth and were commonly presented in bullet points that exceeded the required FOUR. Question 3 Learning Outcome 3 The case study information states that it is essential that ESA s buyers consider the financial stability of suppliers. a) Outline FOUR sources of information on suppliers financial performance that ESA s buyers might use to ensure that their suppliers are financially stable. b) Describe TWO ratios that ESA s buyers might use to establish whether a potential supplier is financially stable in terms of its profitability. (12 marks) (8 marks) a) Sources of financial information for ESA s potential suppliers might include: Published financial statements -their profit and loss accounts, balance sheets and cash flow statements. These would reveal the supplier s profitability and liquidity to meet the business requirements. Secondary data might include information from business or trade press revealing trends and JANUARY 16_D3_EXAM REPORT _LEARNER_COMMUNITY_FV 3/7

4 developments affecting the supplier e.g. gaining or losing contracts; problems in the supply chain, etc. Credit rating companies - for a fee, these will provide information on the credit status of suppliers and give more data on their financial stability. Inviting the supplier's financial director to give a presentation on current and predicted financial position. ESA s buyers will have an opportunity to ask questions considering the long term nature of its projects. Networking at events with other buyers who use the same supplier. A limitation of this method is that buyers in competing companies are unlikely to share information. 1 mark was allocated for the correct identification of each source and up to 2 marks for an outline of the nature information obtained. Marks were awarded for elements Published Accounts/Financial Statements such as Balance Sheet, P&L Account, etc. if they were presented as individual sources of financial information. This question had a high pass rate. The few weak/fail answers tended to present general sources of supplier information (not necessarily financial data) like trade shows, while others wrongly presented methods of collecting supplier information like questionnaire; site visits; etc. 3 b) The ratios that ESA could use to establish the potential supplier s financially stability might include: Gross profit (GP) percentage - calculated by dividing gross profit by the sales turnover and multiplying by 100 to give a percentage figure. The gross profit is calculated by subtracting the cost of goods sold (also called cost of sales ) from the sales turnover. The gross profit percentage needs to be compared to previous years figures and relevant industry figures in order to establish trends. Operating profit (OP) percentage or Net profit (NP) percentage - when all operating expenses (salaries, rent, rates, administration and distribution) are deducted from the gross profit the figure is OP (before interest & tax) or NP (before tax). As in gross profit percentage above, OP or NP is divided by the sales turnover and multiplied by 100. Again it is important to look at trends from previous years Return on capital employed (ROCE) - calculated by dividing operating profit (before interest and tax) by capital employed (shareholder funds plus long term loans) multiplied by 100. The higher the ROCE figure, the more profitable the supplier as this shows how efficiently the supplier is using its capital. Return on assets - operating profit (before interest and tax) is divided by total assets (fixed and current). Again, the higher the return on assets, the more profitable the supplier, as this shows how well the supplier is using its assets. Up to 4 marks were allocated for the correct identification and brief description of each profitability ratio in the context of the case study. This was a relatively unpopular question which exposed many candidates with a knowledge gap. Around half of the candidates understood the question and knew the answer. Many candidates presented liquidity ratios (not asked for). Others presented more than two ratios often a mixture of liquidity and profitability ratios in which case only the first two were marked where they either gained marks (if profitability ratios) or missed marks altogether. JANUARY 16_D3_EXAM REPORT _LEARNER_COMMUNITY_FV 4/7

5 Question 4 Learning Outcome 4 a) ESA has developed an on-line information system for potential bidders, which is the only channel for obtaining access to information to tender documents from the agency. Describe THREE benefits to ESA of having an e-tendering system. b) Explain ONE potential disadvantage to ESA of having an e-tendering system. (15 marks) (5 marks) The question tested candidates understanding of the benefits and disadvantages of e-sourcing. a) The benefits might include: Best practice - Providing a platform for cross-functional and stakeholder collaboration at ESA, facilitating internal communication and data sharing about procurement projects. Consistent and transparent use of standardised/controlled procedures will enable devolution of transactional tasks to non-procurement staff to remotely participate in sourcing without compromising best practice. This will free up ESA s buyers to focus on more value-adding activities. Cost Saving process efficiencies and automated tasks will reduce labour costs. Reduction in paper based information will cut down costs of printing, copying, postage, and stationery. Time saving faster electronic transmissions will reduce process cycle times and improve efficiency. The screening of bids against pre-qualification criteria will be faster and more accurate, reducing the time spent at ESA on the analysis of numerical information. Wider supplier base/access with 20 countries having an interest in ESA, e-tendering is able to operate without impediments in terms of geographical distance or time zones. This means that it can run 24/7 and interact with suppliers globally. Improved training and efficiency - e-sourcing applications can be used as offline training tools to give employees hands-on experience without jeopardising the organisation's actual data. Improved quality and capability-because the total sourcing process is standardised, transparent and efficient in evaluating potential suppliers dispersed globally, ESA can ensure the only quality capable suppliers are selected. Others Reputation/image enhancement; improved internal/external communication and relationships; etc. Up to 5 marks each were allocated each for explanations of any three advantages for ESA of having an e- tendering system. This was a popular question where almost all candidates gained pass grade or above marks. Stronger answers displayed detail and application to the case study. b) Disadvantages of an e-tendering system might include: Significant initial investment costs for hardware and software required for ESA s e-tendering system. Staff training that will be needed in ESA to operate the system; time off needed to receive the training; and dip in performance by newly-trained staff. JANUARY 16_D3_EXAM REPORT _LEARNER_COMMUNITY_FV 5/7

6 Some potential suppliers might be precluded or deterred from tendering if they lack the expertise or technical equipment to bid electronically through the ESA system. There may be issues regarding the protection of commercially sensitive information and intellectual property submitted to the e tendering system. This may be particularly important for ESA, given the nature of the organisation's operations in hi-tech space exploration. Up to 5 marks were allocated for correct explanations of ONE disadvantage to ESA of having an e-tendering system. As in part (a) the pass rate was high - the most popular answer here was the potential disadvantage to SMEs which may lack the technological resources. Higher marks were awarded to more detailed explanations that included references to the case study information. Question 5 Learning Outcome 5 The case study information states that ESA is owned by 20 European countries and that it aims to support the industries and economies of those countries. Analyse FOUR legislative, regulatory or organisational requirements that an organisation such as ESA, will need to consider when sourcing from international suppliers. (20 marks) This question tested the candidates knowledge of internal/external compliance issues when sourcing requirements from international suppliers. These might include: Documentation relating to imports-this might include documents such as import licence, bill of lading or airway bill, insurance policy, certificate of origin, supplier payment documentation, etc. Import duties or tariffs imposed on a wide range of goods entering the EU from non-eu countries; ESA would need to establish whether and items sourced from an international supplier are liable as there are implications on the final cost of purchase. Incoterms ESA must know the significance of incoterms (e.g. ex-works, FAS, FOB and DDP) which determine rights and responsibilities (risks and costs) and the stage at which the ownership of the goods takes place- more often before delivery. Incoterms therefore clarify these rights and responsibilities -e.g. in ex-works the buyer s risk starts at the supplier s premises whereas under a DDP (Delivered Duty Paid), the supplier s risk ends at the buyer s premises. Payment mechanisms- these determine where any risk of default may fall. The letter of credit is the safest method as the ESA s and the supplier banks will manage the risk to ensure that the supplier will deliver and the buyer will pay. The other mechanisms such as advance payment or open account trading respectively puts the default risk on ESA or the international supplier. Applicable law ESA should know which country s law governs the contract if there is any subsequent dispute. The Rome convention allows the two parties to agree on this aspect in writing, otherwise in the event of a dispute the matter will be inferred from the nature of the contract and the prevailing circumstances. JANUARY 16_D3_EXAM REPORT _LEARNER_COMMUNITY_FV 6/7

7 Legal frameworks- countries may differ on issues such as health and safety, environmental protection, CSR and labour laws, intellectual property rights and product quality/safety standards some of these may be critical to ESA s business and reputation. Ethical sourcing and fair trade policies - ESA will have to ensure that any potential supplier has in place ethical policies and that it does not breach the Ethical Trade Initiative which aims to ensure that suppliers are not exploited and are encouraged to provide better work conditions for their workers. Currency and exchange rate risks - if ESA s suppliers are outside the Eurozone there is a potential risk of substantial financial loss due to exchange rate fluctuations given that the projects are of a long term nature. ESA might mitigate this by negotiating prices in euros or by entering into a forward foreign exchange rate contract with its bank. Other considerations: o Public Procurement constraints- as an EU public organisation ESA will be subject to tender rules covering thresholds, timescales, award process, etc.; rigid budgetary constraints; expansive stakeholder interest; Anti-corruption law; Freedom of information; etc. o Organisational considerations may include communication issues associated with geographical/time zone differences; logistics and lead times; etc. o Cultural considerations attitudes regarding diversity, gender, religion, bribery/corruption, etc. Language and communication may also be a key factor in terms of negotiation and contracting processes. Up to 5 marks were allocated for the correct identification and brief analysis of each of four legislative, regulatory or organisational requirements. This was a wide spectrum question attracting many possible answers and had potential for high marks. However only about half of the candidates scored above pass grade marks. This general underperformance was mainly attributed to poor time management (being the last question) and misinterpretation (some candidates unnecessarily trying to classify their answers into three categories legislative, regulatory and organisational). JANUARY 16_D3_EXAM REPORT _LEARNER_COMMUNITY_FV 7/7