CIPS. Measuring Purchasing Performance

Transcription

1 CIPS Level 4 PRACTICE QUESTIONS Measuring Purchasing Performance

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3 Practice Questions This is a collection of exam-standard questions to help you practise what you have learned. Each question or small group of questions is prefaced by an indication of the chapter in your reference text that it mostly relates to. However, bear in mind that exam questions may range across more than one syllabus area; to prepare a full answer you may need to draw on material from more than one chapter. See Chapter 2 of your reference text Lowest cost of supply An important distinction for purchasing professionals is that between the lowest price and the lowest cost of supply. Explain what is meant by this distinction and identify the factors you would consider when selecting suppliers so as to achieve the lowest cost of supply in the long term. See Chapter 3 of your reference text Specifications (CIPS November 2002) Prepare a report for your head of purchasing which: highlights the differences between conformance and performance specifications; and identifies the circumstances when each might be appropriate. Information technology (CIPS May 2007) Describe FIVE uses of information technology (IT) in the generation of purchase and supply performance data. (25 marks) See Chapter 4 of your reference text Seaman Seaman Limited is a medium-sized organisation with a wide range of materials and finished goods stock. The company s managing director is anxious to reduce the value of stock held and has asked you, the newly appointed purchasing manager, to outline your proposals for achieving this. You are required to write a memo to the managing director in response to this request. 1

4 Measuring Purchasing Performance Stockholding costs (CIPS May 2007) Explain why it is important to measure the costs of holding stock. (10 marks) Identify and describe THREE measures of the costs of holding stock. (15 marks) Holding costs and acquisition costs The costs associated with stocks (or inventories) are often classified as holding costs and acquisition costs. Describe the elements of cost that occur in each of these categories. In the light of these cost factors, and other factors that you consider relevant, present the arguments for and against maintaining buffer stocks. See Chapter 5 of your reference text New supplier (CIPS May 2002) Stability and performance are the key areas of investigation when evaluating a new supplier. Discuss this statement. How can financial information be used in the supplier evaluation process? 2

5 Winterburn Winterburn Ltd has been trading steadily for many years as a manufacturer of ski shoes. In 20X4 a surge in skiing increased the level of the company s turnover significantly. The summarised balance sheets for 20X3 and 20X4 are given below. WINTERBURN LTD SUMMARISED BALANCE SHEETS AT 31 DECEMBER 20X4 20X Fixed assets Intangible assets Tangible assets Property Plant Current assets Stock Debtors Investments 120 Cash at bank Creditors: amounts falling due within one year Trade creditors Taxation Net current assets 334 Total assets less current liabilities 888 ==== ==== 3

6 Measuring Purchasing Performance 20X4 20X Capital and reserves Called up share capital Ordinary 1 shares Profit and loss account ==== 628 ==== Sales for 20X4 and 20X3 respectively were 1,600,000 and 1,150,000. Cost of goods sold for 20X4 and 20X3 respectively were 1,196,000 and 880,000. Given that this is the only information available, you are required to comment as fully as you can on Winterburn Ltd s financial position. Key areas (CIPS May 2002) Draft a report for your director of purchasing describing three key areas you would investigate when appraising suppliers, prior to awarding a major contract. Include a definition of supplier appraisal in your report. Proactive (CIPS November 2002) Provide a detailed explanation of five activities a proactive buyer could undertake to reduce costs and improve control of the purchasing cycle. See Chapter 6 of your reference text Ensuring supplier quality Describe the role of the purchasing function in ensuring quality through: appropriate selection of suppliers; and management of suppliers following selection. In what other areas can the purchasing function contribute to quality? Vendor appraisal Purchasing departments in recent years have assumed a broader role in increasing and maintaining quality standards. Putting yourself in the position of a buyer sourcing a quality-critical component, explain: the procedures and criteria you would use in a vendor appraisal the steps you would take to ensure that performance standards were maintained once the suppliers had been selected. 4

7 Practice Questions See Chapter 7 of your reference text Cashflow (CIPS May 2002) The cashflow forecast shown below has been drawn up for a new supplier. Analyse the information and what it tells you about the supplier s business. Qtr 1 Qtr 2 Year ended April 2003 Qtr 3 Qtr 4 Totals for year Receipts Credit sales 1,000,000 1,500,000 1,500,000 1,500,000 5,500,000 Total receipts 1,000,000 1,500,000 1,500,000 1,500,000 5,500,000 Payments To creditors 1,000,000 1,000,000 1,000,000 1,000,000 4,000,000 Employee wages 350, , , ,000 1,400,000 Rent and rates 100, , , , ,000 Heat, light, power 20,000 20,000 20,000 20,000 80,000 Capital purchases 750, ,000 Total payments 1,470,000 Surplus/deficit ( ) for quarter Opening bank balance 1,000,000 Closing bank balance 530,000 ========= 2,220,000 1,470,000 1,470,000 6,630, , ,000 30,000 30,000 1,130, , ,000 ========= 190, ,000 ========= 160, ,000 ========= 1,000, ,000 ========= Supplier assessment (CIPS May 2007) Using any organisation with which you are familiar, discuss the importance of frequent and close communications between buyer and supplier. (10 marks) Identify and describe THREE financial or accounting tools that might be used to assess the efficiency of a supplier. (15 marks) 5

8 Measuring Purchasing Performance Castle (CIPS May 2001) Castle Bookshops is a large and, up to now, successful chain of bookstores, with shops in most towns and cities of the United Kingdom. They are a major route to market for many publishing companies, and for many years have enjoyed cordial relationships with these companies. They have often referred to their relationship as partnerships. However, things are changing. The advent of e-commerce, and the emergence of internet selling, has brought new entrants into the book selling market. These entrants tend to provide a much more extensive range of books, and their promise of prompt delivery to the customer s address, with no carriage charges, has made a major and adverse impact on Castle s business. The most serious problem for Castle is arising around the diminishing sales of non-fiction titles; in particular, those aimed at students on college, university and professional courses. The management at Castle feels that this is due to two main factors. The first reason is considered to be the propensity of students to buy electronically arising from their almost universal computer literacy. The second reason is connected with the fact that many of the books that students require are of a specialised nature, with a narrow readership. These books are not stocked in all shops, but are acquired to special order when customers make a request. The books bought are not selected by students, but prescribed by course tutors. The facility to browse in the bookstore is not valued so greatly by these particular customers, although it attracts other kinds of buyer. London Press (LP) are academic publishers, and are well-established suppliers to Castle; they have been doing business together since Castle s formation as a business in the 1960s. The relationship has been warm and rather comfortable, with both parties making a satisfactory profit from their mutual interest in meeting the need for academic texts. LP have also seen the advent of electronic commerce impact upon their business, although not in quite the adverse way that Castle have. Internet booksellers sometimes operate as a virtual warehouse, accepting orders from customers, but asking publishers to mail texts direct to customers. This has not given LP any great problems; they are used to sending out individual texts to traditional booksellers like Castle, although the expectations are that same day despatch will be achieved. Castle has never asked for this level of service. Castle have decided to attempt to recover the slide in their business by becoming what they say is more businesslike with their suppliers. They have indicated in a recent letter to LP that larger discounts are necessary, that there will be a listing fee for titles to be sold through Castle, and that in the middle to long term they will seek exclusive rights to sell LP s books. LP are extremely surprised and worried by this news, and have spent the past couple of days planning their next move. They have decided that they wish to continue to distribute at least some of their books in the traditional way. Comment critically on the warm and rather comfortable nature of the relationship, considering how this differs from a true partnership. Comment on the ways in which, despite the letter, both parties might still have much to gain from working together. 6

9 Practice Questions See Chapter 9 of your reference text Appraisal An article written in 1972 suggested that: Despite many apparent advantages of what should be an intrinsic part of management control many appraisals are largely a waste of time. Why might this criticism be levelled at appraisals? What new methods for appraisal schemes are now available? See Chapter 10 of your reference text Five measures (CIPS May 2007) Describe FIVE measures that might be applied to the performance of a purchasing department. (25 marks) See Chapter 11 of your reference text Job description and person specification Explain the purpose of: (i) (ii) a job description a person specification. Explain the relationship between the two documents. Training David is a training manager with W plc, which has a number of manufacturing subsidiaries. He has been asked to audit the training procedures at one of these subsidiaries, about which complaints regarding delivery delays and quality have been received. In addition, labour productivity is relatively low at this subisidiary, although the quality of staff compared favourably with others. David has found that new employees are trained in the normal work of the plant by experienced workers on the job. When new tasks are required, the supervisors provide coaching. In the purchasing section, only qualified staff are employed. Their managers are available for counselling if problems arise. You are required to explain: the disadvantages of the above methods of training; possible alternatives, with their potential disadvantages. 7

10 Measuring Purchasing Performance Scenario-based questions Turnbull Associates (CIPS May 2007) Organisational structure Turnbull and Associates (TA) is a well-known firm of commercial lawyers, working from prestigious city-centre offices in London, Leeds and Cardiff. There are about 120 lawyers and support staff working at each location. Commercial law is a well-rewarded and competitive business; and top-flight practitioners are hard to find and retain. TA therefore prides itself on being a very good employer and a very good place to work; and it successfully uses this competitive edge to retain the very best lawyers in its employment. Each of its three offices has its own high-quality gymnasium facilities, an excellent staff restaurant, and free staff car parking. These benefits undoubtedly assist TA in attracting and retaining the highest quality lawyers, which in turn attracts highly desirable corporate customers. Each of the three sites operates fairly independently. All routine services, such as printing, photocopying, security, catering, courier, office cleaning, minor maintenance and temporary staff are bought from local suppliers. The gymnasia and catering are all run in-house, by staff employed by TA. Similarly, all commodity items such as stationery, office supplies and equipment, catering foodstuffs, and so on, are all bought from local suppliers. The managing partner of TA, Amelia Turnbull, has recently completed an MBA. As part of her studies she was introduced to the concept of supply chain management, and of outsourcing non-core services; and she believes that there might be significant savings and economies of scale attainable if TA improved its purchasing performance, and allowed other service providers to take on some of the support functions. But Amelia also knows that it is crucial not to devalue the prestigious image of TA, whether in the perception of its customers or in the perception of those who work for TA. Amelia is anxious to avoid losing control of any aspect of TA operations or appearance: she is particularly wary of any aspect of TA being seen as low quality, even at the level of the stationery used, or the coffee served to visitors. Purchasing consultancy Amelia has invited a purchasing consultancy, Buyers United, into TA, to examine current purchasing practice and procedures and to identify any potential savings which might be made. She has made it absolutely clear that any potential changes must have no negative impact whatsoever on any other aspects of TA operations. Buyers United has accepted the invitation, and has secured agreement to a fee of 50% of the first year cash savings that it achieves; plus 25% of the second and third year savings if there is no drop-off in customer perception of TA. As a purchasing professional employed by Buyers United, you have been selected to work on the TA project. It is seen as a very prestigious project for a very prestigious client, with potential for excellent fee returns if successful. Even more important, TA is highly influential in the wider legal profession, so success here might well be a very good lead-in for Buyers United to get business from other law firms. Your own personal reward for the project will include a bonus related to the amount of fees achieved. 8

11 Practice Questions Research You have three weeks at TA to research the initial scope for savings. You will be based at the London office of TA, but you are free to travel to the other two sites if you wish; and you have been empowered by Amelia to speak with anyone at all within TA and you will get straight answers to any questions you raise. To assist you, TA has seconded one administrator from the Leeds office, Marie Scarlett, to help you in any way she can over the three weeks. Marie has been involved in local purchasing, and knows her own Leeds office procedures and people very well. Having worked for TA for nearly ten years including a six-month attachment to the Cardiff office she also has a little knowledge of purchasing procedures at Cardiff and London. Marie is known and well respected by all staff at all TA sites, is very good at producing reports and spreadsheets, and has access to all financial data for the whole organisation. The information in this case study is purely fictitious and has been prepared for assessment purposes only. Any resemblance to any organisation or person is purely coincidental. The two questions below relate to the case study above and should be answered in the context of the information provided. Performance measures Identify FIVE areas of purchasing at TA that you would investigate for potential savings. Give reasons for your choices, and state a measure that could apply to each area. (15 marks) Describe FIVE performance targets that you would set for Marie to achieve during the three weeks she is assisting you. (10 marks) Cost savings Describe TWO ways of achieving cost savings while maintaining the high-quality image of TA. (10 marks) Your investigation may lead to the selection and appointment of new suppliers to TA. Explain the measures you might apply to their performance once appointed. (15 marks) 9