Foundation Diploma in Purchasing and Supply. Managing Purchasing and Supply Relationships L4-04 LEVEL 4. Senior Assessor s Report

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1 Foundation Diploma in Purchasing and Supply Managing Purchasing and Supply Relationships L4-04 LEVEL 4 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

3 SECTION A Q1 Review the FIVE options and assess the appropriateness of each for Tone Tint (25 marks) Analysis of the Question The case study posed five options for Tone Tint and the question required an assessment of each option giving the advantages and disadvantages of each. The options were the continuation of the long standing relationship with Wrapit, the supplier, insourcing the work, changing suppliers, establishing a partnership with Wrapit or purchasing from an international source. The question did not require a conclusion to be drawn or a recommendation to be made on the options. Analysis of the Answer There were a great many points both for and against each option that could have been made and many of the responses were extremely detailed. What was expected was a consideration of the following: Option 1 The material to be supplied was low cost, thus giving the existing supplier a considerably expanded volume of business that would enable increased leverage on both prices and service for Tone Tint. There was no evidence that the supplier could handle the extra volume. The cost and environmental effects of transportation would need to be considered. The increased business was a departure for TT and retaining a supplier so far away would be a delivery risk for TT unused to dealing with large volumes. Option 2 Insourcing the packaging would dilute TT s focus on paint manufacture which is its core business. It would incur a huge capital cost at a time when capital will be needed to expand the paint production facilities to supply the new customer. Moreover, TT will become a competitor to the existing packaging companies. Also, it will take time to set up the production facility that will have to be managed alongside requirement to fulfil the new customers needs. Option 3 Switching the business to the local supplier is an enormous risk for TT who, in any event, lacks both the skill and the inclination to conduct a formal appraisal. TT also has no knowledge of costs or conditions in the supply marked and therefore has no benchmark against which to judge a new supplier. The existing supplier may be put out of business depending on the proportion of business placed there by TT. There is also no consideration of other equally close suppliers mentioned in this option. Option 4 The partnering arrangement whereby the paint is transported to Wrapit for packaging requires specialised transport, risk of loss, extra cost and the full and willing participation of Wrapit which cannot be assumed. As an alternative to transporting empty containers it may reduce the total number of journeys but savings are extremely doubtful. This L4-04 May07/SA Report/FV 3

4 solution may also impose a safety risk as well as adding to the pollution cost. Also, how far away from Wrapit is the retailer? Option 5 Contracting the containers from an international source would provide further complications. The chief advantage might the low cost but this has to be offset with the other difficulties. TT has little experience and no skill in sourcing within the UK let alone internationally. Specifications, samples, logistics, contracts, INCOTERMS, language barriers, time differences and lead times would add up to considerable risks. Exam Question Summary The assessment of each option carried 5 marks and the vast majority of candidates score highly, correctly identifying both the advantages and difficulties of the options posed. While those summarised above represent one view, other equally valid advantages and disadvantages were provided by candidates that earned high marks. Good answers took a realistic approach to the assessment of each of the options without including a lot of unnecessary detail. The few weaker answers tended to discuss their favoured approach this encroaching on the answer require in question 2 part (b). Q2 (a) Outline THREE weaknesses of Tone Tint s approach to sourcing and supplier management (9 marks) Q2 (b) Discuss the alternative options not considered by Tone Tint (16 marks) Analysis of the Question Part (a) requires an outline of just three weaknesses of Tone Tint s approach and in part (b) alternative options. Analysis of the Answer Part (a) The weaknesses included the lack of any independent purchasing function, the lack of supplier appraisal or a mechanism for conducting such appraisals, the choice of suppliers based on personal relationships, the lack of any benchmarking or performance assessment of suppliers and the over-reliance on one customer order to change the entire basis of their corporate strategy. Part (b) Any two or more options were required, other than those already discussed in Question 1. Thus possible options would include: Dual sourcing, using the existing supplier Wrapit for the existing workload and sourcing a new supplier for the new retail work. This would require Tone Tint to conduct a market survey to identify possible suppliers, carry out a supplier appraisal and make a L4-04 May07/SA Report/FV 4

5 selection based on clear and measurable criteria. Whether they have the capability of doing this is questionable but they could buy in the necessary expertise. Developing a local supplier or suggesting the greater involvement of the retailer in establishing a more responsive supply chain may be another avenue for consideration. Again, the question of sourcing the market and supplier evaluation needs to be considered although the retailer would have some expertise in this area. Involvement of the retailer may open TT up to some unwelcome scrutiny by them which may affect their confidence in TT. Exam Question Summary For part (a) many candidates were able to earn the maximum 9 marks by correctly identifying the problems contained in the text of the case. Candidates failed to gain valuable marks by identifying fewer than the required three weaknesses. Many candidates found part (b) difficult having already evaluated the five options in question 1. There were, however a number of highly imaginative responses to this question which not only suggested options but evaluated them briefly also. Weaker answers merely suggested that TT conduct a tendering exercise without considering the implications for TT and their ability to carry this out properly. SECTION B Q3 (a) Describe the differences between the following relationship types: Outsourcing Service contracts Sub-contracting (15 marks) Q3 (b) Explain FIVE benefits that organisation seek when outsourcing activities. (10 marks) Analysis of the Question The requirement for part (a) was a definition and example of each together with a suggestion of the type of relationship that might be appropriate. In part (b) a brief explanation of the benefits of outsourcing was needed. Analysis of the Answer The differences between outsourcing, service contracts and sub-contracting may be summarised as follows: Duration of the contract: long term for outsourcing, tending to be shorter for the others Autonomy of the supplier: High in the case of outsourcing but lower for the others L4-04 May07/SA Report/FV 5

6 Transfer of responsibilities: From an internal department within the purchasing organisation for outsourcing but not in other cases Transfer of employees in outsourcing but not in the other cases The difficulty of switching suppliers: Very difficult with outsourcing, mainly easy with the others Relationship with the supplier: Very close with outsourcing more distant with the others. This difference should have been illustrated with examples. The benefits of outsourcing include: Cost saving Enabling the focus on core business Greater access to industry expertise Enabling the use of the latest technology Improved product or service quality through greater specialisation Better return on assets employed More consistency in service provision Exam Question Summary This was an extremely popular question that was generally very well answered. The better answers gave definitions of outsourcing, service contracts and sub-contracting, detailed some examples to illustrate the difference and went on to correctly identify the likely relationships associated with each, ranging from partnership for outsourcing to transactional/ arms-length for sub-contracting. Part (b) of the question was also extremely well answered with the majority of candidates gaining the full 10 marks. Q4 (a) Explain supplier development, giving appropriate examples] (10 marks) Q4 (b) Discuss the impact of e-purchasing on supply relationships (15 marks) Analysis of the Question In part (a) candidates were expected to define supplier development before explaining the various forms that this might take and providing examples of each. For part (b) candidates were requires to define e-purchasing and then to assess how its uses may impact on relationships with suppliers. As the key word discuss was used in the question, both the positive and negative aspects of the likely impact needed to be assessed in the answer given. Analysis of the Answer Supplier development is the process where buyers support suppliers in making improvements in their offering. This can take the form of improvements in L4-04 May07/SA Report/FV 6

7 infrastructure (increasing manufacturing or service capacity) or improving processes both technical and administrative. The objective is to either complement or enhance the efforts of the buying organisation to gain competitive advantage in their market. Assistance can be in the form of technical advice, skills training, knowledge transfer, quality management systems, inventory or logistics management or through enhanced electronic communication and planning systems. In markets where there are few suppliers, supplier development may not be a choice but more of a necessity to provide a barely acceptable input to the buying organisations requirements. Candidates would be expected to provide examples from their own organisations where possible or from their wider reading if not. On the question of the impact of e-purchasing on relationships, candidates were expected to acknowledge the wide variety of e-purchasing techniques that can be used. Some of these will be purely transactional and therefore have little relational impact. Others are more strategic and have a major impact. This gives rise to the notion that the use of e-purchasing in the right circumstances can have many positive benefits, while their inappropriate use can have a wholly negative effect. E-purchasing is defined as the electronic acquisition of goods and services, including all processes from the identification of a need to the payment for these purchases including contract management, supplier management and development. Thus some of the manifestations of the activity can range from on-line supplier catalogues to electronic invoicing, from collaborative development forums to reverse auctions and from s to tender evaluation software. Candidates were expected to discuss some of these manifestations giving an indication of their impact, either positive or negative, on the buyer- suppler relationship. Clearly, there exists the possibility that one will benefit from a particular method and the other will suffer. Exam Question Summary This was another popular question with a wide variety in the quality of the answers. The stronger answers made an attempt at a definition of supplier development, giving an insight into the many forms that this could take. Some explained how supplier development could arise from supplier appraisal, where a predicted shortfall in performance could be identified pre-contract and measures to rectify the problems could be jointly agreed from the outset. Others explained that problems identified by vendor rating processes could be solved by supplier development activity. Stronger answers gave one or two relevant examples to illustrate their points. The weaker answers made no attempt to define the term, give examples of the practice or mention the process needed to analyse the need for the activity. For the e-purchasing question, candidates for the most part displayed a good knowledge of the various e-purchasing tools and techniques and related their use to the likely impact they might have on relationships between buyers and suppliers. Many gave rather too much emphasis to the techniques, explaining the full range in inappropriate detail. For example, a number of responses dealt in some considerable detail with and its uses (and sometimes abuses). While has indeed revolutionised the way in which we L4-04 May07/SA Report/FV 7

8 now communicate, it is only one such method among the many available and its almost universal use means that it may be taken for granted. Q5 (a) Q5 (b) Discuss the benefits of the EU Public Procurement Directives for public sector buyers and suppliers Discuss the drawbacks of the EU Public Procurement Directives for public sector buyers and suppliers (12 marks) (13 marks) Analysis of the Question Candidates were expected to outline the purposes of the procurement directives: to achieve better value for money for public sector organisations and to promote open and fair competition throughout the EU for public sector contracts. Analysis of the Answer The benefits that may be discussed include the following: Transparency in that suppliers know what is expected of them in bidding for business and that the public can see where the money is spent. That the criteria to be met by suppliers is open and fair. That all suppliers will have the same opportunity to submit a bid for a particular contract. There are no last minute surprises in the bidding process, no extra requirements can be specified once the process is under way. Public sector organisations have time to organise themselves and to follow a standardised procedure. National and corporate preferences are eliminated by a series of check and balanced within the system so as to ensure a genuinely free market within the Union. Processes are ethical and take account of environmental issues, thus promoting ethical relationships. In part (b) candidates were asked to discuss the drawbacks of the legislation. These could be outlines as follows: The procedures take time and cannot satisfy urgent requirements arising in the public sector Time equals money and therefore the procedures are costly both to buyers (especially from SME s) who may have to expend considerable sums to put together the tender documentation and to the public sector who have to administer the tendering process. Buyers can only negotiate with suppliers under strictly limited circumstances so may not be able to derive maximum value for money. L4-04 May07/SA Report/FV 8

9 That a supplier who has performed in an exemplary manner on a contract cannot be automatically awarded another without the procedure having to be followed again. Exam Question Summary A very popular question even among candidates from outside both the EU and the public sector. Most candidates displayed a reasonable knowledge of the directives; some explaining these at length and in unnecessary detail. Stronger answers discussed both the benefits and drawbacks in the two part answer, using their knowledge of the directives as appropriate illustration. Many used their experience in buying for the public sector to provide real-life examples of the advantages and disadvantages of the directives. These scored particularly high marks. Weaker answers either concentrated on the detail of directives without answering the questions or displayed a lack of knowledge of the directives thus giving no basis for the required discussion. Q6 (a) Q6 (b) Identify FOUR organisational cultural types. Explain using examples how each cultural type within a purchasing organisation might influence supplier relationships. Discuss the potential cultural differences that can make transactions with an international supplier more problematic that with local suppliers. (20 marks) (5 marks) Analysis of the Question Part (a) of the question requires candidates to firstly identify four cultural types and then explain how each might influence supplier relationships. In identifying the types, candidates are able to choose a number of models for example, Schein, Handy, Johnson and Scholes or the one detailed, but unattributed, in the study guide. The identification requires a brief description only. The explanation needs a fuller treatment in making an assessment on how each of the types described impacts on relationships between buyers and suppliers. Part (b) of the question examines the problems that may arise from cultural differences in an international setting. A short discussion is required for this. Analysis of the Answer Organisation culture has been defined as the way we do things round here. It consists of three levels: symbolic, attitudes and beliefs and underlying assumptions. If a culture needs to be changed, action needs to be taken at all three levels. These are associated with increasing difficulty as symbolic change may be readily engineered while underlying assumptions are very difficult to surface. L4-04 May07/SA Report/FV 9

10 Classification models tend to be a gross over-simplification of reality but tend to be useful in guiding the general approach that may be taken with a particular type. For example, a bureaucratic culture, characterised by fixed rules, formal hierarchy, an inability to see the need for change and an abundance or red tape will need time and patience from a new supplier, both to obtain new business and to develop a relationship which is more that arm s length. An aggressive culture, marked by a readiness to challenge the status quo, take an aggressive stance on suppler relationships and drive down prices might provide a difficult environment for a potential supplier. The laid back culture with its emphasis on individualism may make an equally difficult environment for an internal buyer. Securing buy-in to the purchasing function where costs or value for money may be of secondary importance to creativity would pose problems of persuasion to the most committed of buyers. In a paternalistic culture, very often typical in smaller firms, the founder sets the cultural tone. Decision making is centralised to the extent that even minor decisions need to be referred to the centre. In the absence of the decision maker, the organisation can become either paralysed or decisions will be made as the boss would have wanted them to be made. Finally there is the problem of the outcome where either compatibility or incompatibility exists. Cultures that are synergistic tend to be laid back, bureaucratic to bureaucratic and progressive to progressive, laid back to paternalistic or progressive to paternalistic. Conflicts between cultures occur in many more examples including aggressive to any other culture, laid back to bureaucratic or dominated to laid back. In part (b) of the question problems may occur on the international scene with such things as the importance of extending courtesy between cultures, the importance of timescales, the use of negotiating ploys, the sense of fair play, the use and interpretation of body language, the role of women in negotiations (or indeed, in business in general, the importance of status, the role of conflict, standards of dress and deportment and the readiness to ignore or uphold contract terms and conditions. Exam Question Summary Another popular question where the first part received some excellent answers while the second was misinterpreted by many candidates. Most candidates used the model of cultural types contained in the study guide. This provided a choice of four from the six explained by the guide. While the descriptions were very good for the most part, the relationship aspect was less well done. Many candidates quoted at length from the study guide in describing each cultural type while ignoring the impact that this may have on the relationships between organisations. Very strong candidates described the types well and explained the impact in terms of likely synergies and problems. In the second part a few candidates produced excellent answers while some gave a generalised list of the difficulties of trading internationally, describing factors such as L4-04 May07/SA Report/FV 10

11 Incoterms and logistics difficulties that had little to do with the differences in international cultural types. APPENDIX: Syllabus matrix indicating the learning objectives of the syllabus unit content that each question is testing. L4-04 May07/SA Report/FV 11

12 L4-04 MANAGING PURCHASING AND SUPPLY RELATIONSHIPS Examination Series Tone Tint SECTION A SECTION B Question No Learning Objective a a a b a b a b a b 1 The context of relationships in supply chain management x x 1.8 x 2 Assessing and selecting suppliers x 2.5 x Managing outsourced relationships 3.1 x x 4 Developing and managing relationships with suppliers x x 4.5 x 4.6 x x L4-04 May07/SA Report/FV 12