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CIPS Exam Report for Learner Community: Qualification: Advanced diploma in procurement and supply Unit: AD4 - Category management in P&S Exam series: Nov 2016 Each element of a question carries equal

1 CIPS Exam Report for Learner Community: Qualification: Advanced diploma in procurement and supply Unit: AD4 - Category management in P&S Exam series: Nov 2016 Each element of a question carries equal weighting unless otherwise stated. Question 1 Learning Outcome 1 Question: Explain the different stages of a process that a procurement and supply function can apply to achieve effective category management. Learning outcome addressed: 1.3 Command word explanation: Explain give reasons for or account for something Mark 25 Marks Examples of good content/good approaches in answers: There are a number of different category management models that could be used to achieve effective category management they are the CIPS category management model, A T Kearney s 7 step model and Johnathan O Brien s 5 step category management model. I will use O Brien s Model as an example: Stage 1: Initiation, this starts off with a kick-off workshop, in the workshop the following will happen: The setting up of the cross-functional team. Confirming what goods/services are going to be included in the project. Identification of how the stakeholders will be engaged using the RACI model and how they be communicated with. Stage 1 will end with a stage gateway review to ensure nothing has been missed before moving to the next stage. Stage 2: Insight, this is the data gathering stage and starts with a situation workshop to find out the situation of the organisation, it will also look at: The current supplier and to understand their position in the market. Potential new suppliers to see what products are available and their market position. Which tools (such as Porters five forces) can be used to understand the organisation and supplier/potential suppliers market position, which techniques would be used and where the data would be obtained (through internet searches, trade shows, trade organisations for example). This stage will also end with a stage gateway review. Stage 3: Innovation, this will start with an options workshop to: Look at all the data gathered in the last stage and review it using such tools as SWOT analysis. Decide the sourcing strategy to be used. Undertake a risk analysis and start risk and issues logs. Before the stage gateway review takes place the last action will be to have the sourcing strategy signed by the NOV16_AD4_EXAM REPORT _LEARNER_COMMUNITY_FV 1/10

2 senior stakeholder. Stage 4: Implementation, this stage will start with the implementation workshop where the cross-functional team decides how to make the chosen sourcing plan happen through: Project and change management. RFP/RFQ/Tendering. Supplier selection and negotiations. Contract planning, award, implementation and management. Followed by a stage gateway review before moving to the final stage. Stage 5: Improvement. This stage does not have a stage workshop and looks at: Lessons learnt. Supplier and supplier relationship management. Innovation, benefits and value for money and continuous improvement. Ongoing alignment to the business requirements. Ongoing market analysis and when to restart the category management process again. Examples of content for merit/distinction grade answers: Better answers which managed to achieve merit passes and in some exceptional cases distinction grades included a greater depth of understanding of the selected category management model, the use of appropriate tools and techniques and short descriptions of the use of each tool. Demonstrated a knowledge of all the relevant stages and sub-stages and the answers also had a logical flow to them. Examples of poorer content/ poorer approaches in answers: Weaker answers tended to explain the CIPS Procurement management process, focus on the first two or three stages of the CIPS or A T Kearney category management process and then list or not provide detail on the remaining stages. Also providing a lot of information and diagrams of different tools and techniques that could be used. Concluding comment: Candidates were generally able to provide pass answers with a number providing merit or distinction answers which showed a very good understanding of the different stages of their chosen category management model. The most popular model used was the A T Kearney category management model, other models used were the CIPS and O Brian s and the OGC category management models. NOV16_AD4_EXAM REPORT _LEARNER_COMMUNITY_FV 2/10

3 Question 2 Learning Outcome 2 Question: Assess the following sourcing options available to an organisation in the development of a strategic sourcing plan. (i) Single sourcing (ii) Dual or multiple sourcing Learning outcome addressed: 2.4 Mark 25 Marks Command word explanation: Assess evaluate or judge the importance of something Examples of good content/good approaches in answers: Candidates were expected to examine single and dual/multiple sourcing options. Single Sourcing. The advantage of using single sourcing is that the organisation will: Only have to deal with one supplier to order its products, the supplier may setup a catalogue to provide electronic direct ordering and collate orders to ship together at the end of each day. Have a better relationship with the supplier, the organisation can work with the supplier to resolve any issues that may arise to ensure smooth running of the contract. Have lower prices through greater economy of scale, because you are buying all your products from just one supplier this will increase their buying power in the market meaning they can give you better prices. Receive faster deliveries as the supplier may stock the more popular items. The supplier may produce products and keep them in stock at no extra costs and offer preferential deliveries. Have less administration due to having only one supplier, there will only be one invoice a month meaning the organisation s processing costs are reduced, this could also lead to a reduced headcount allowing the organisation to make more savings. The disadvantages of single sourcing could be: Not benefitting from innovation in the market place as the supplier will only supply what they are contracted to, this could lead to loss of market position, reduced sales and loss of profits. Supplier Lock-in, as the supplier knows your business it will be harder to change to a new one, there is likely to be high switching costs involved if the organisation did change supplier as they may have to change all their process and procedures. Increased off contract spend. Switching to a new supplier could mean that people continue to use the old supplier as they know and trust the products. Competitive pricing. It will be harder to for the organisation to ensure that they are receiving the best prices as they would not be able to compare they cost against another supplier. The supplier may increase their prices and also the quality of the products might decrease. Delays or shortages in supplying the products, the supplier may be concentrating on other customers where there is a higher profit margin for them, or they may be having problems sourcing the raw materials needed to produce your products. NOV16_AD4_EXAM REPORT _LEARNER_COMMUNITY_FV 3/10

4 The advantages of Duel Sourcing could be: Reduced risk of failure as the organisation has the opportunity to source the goods from two suppliers may be by each supplier getting 50% of the business, or there may be a 75%/25% split and the organisation can then use the supplier providing 25% of the goods when there is an increase in demand or the other supplier has supply problems. The option to use the two suppliers in different ways, such as one supplier receives all the bulk orders so that the organisation benefits from economy of scale, receive lower pricing and the other supplier is used to provide low value, low quantity or one off orders. The option to use Small, Medium Enterprises (SME) that would normally be excluded from supplying on large contracts, this could also have the advantage of the SME providing innovated products during the contract period. The Disadvantages of duel sourcing could include: The suppliers may have different prices for the same goods, and departments may decide to buy from the lower priced one, which could lead to contractual issues as the contract may be for a 50/50 split in supply. The quality of the goods supplied could be different between the two suppliers or the quality could be inconsistent meaning a higher number of rejects in goods inwards or more returned goods from the customer leading to the organisations reputation and market share decreasing. Increased supplier relationship and contract management and an increase in the organisations administration costs. Both suppliers will need to be managed to ensure that supply and quality is kept constant and to specification. Service levels and or KPIs will need to be reviewed and actions taken when problems arise. There could be multiple invoices that need checking and paying also if one supplier is a SME, payments might have to made quicker to ensure they have the funds to keep on supplying, this could put pressure on the organisations finances. The advantages of multiple sourcing could include: Increased competition in the market. Lots of potential suppliers in the market means the organisation can pick and choose the one providing the best price. Innovation is strong as suppliers continually develop their products to gain the competitive edge over their rivals. Useful for routine items such as stationary where the focus is on price not cost. The disadvantages of multiple sourcing could include: The need for careful contract and supplier relationship management, suppliers could stop supplying as they concentrate on larger contracts or they decide to discontinue your items or move into a different market. Increased time to monitor supplier performance, suppliers may not provide items of consistence quality or quantity, they may not be interested in keeping to KPIs as they know that if they lose your order, there will be plenty of other customers to sell to. Examples of content for merit/distinction grade answers: Better answers which managed to achieve merit passes and in some exceptional cases distinction grades, tended to start their answers to single and duel/multiple sourcing with the relevant definition i.e. Single NOV16_AD4_EXAM REPORT _LEARNER_COMMUNITY_FV 4/10

5 sourcing is where the strategic decision is taken to source all the organisations requirements from a single provider, they also provided greater depth and breadth in their answers, highlighted potential risks and mitigation and included the use of parallel sourcing. Examples of poorer content/ poorer approaches in answers: Weaker answers tended to concentrate on strategic sourcing and the tools and techniques needed to undertake strategic sourcing or focused on the market and market analysis linking single sourcing to a monopoly supplier, duel sourcing to oligopoly and multiple sourcing to perfect competition. Where answers were correct they tended to be very short and lacking in the demonstration of breadth and depth of knowledge. Concluding comment: Generally this was a poor to well answered question. Some candidates mixed the single, duel and multiple sourcing into each other so there was no logic to the answer lay out. In a few cases candidates applied parallel sourcing to single sourcing however it was more commonly applied to duel sourcing where it was used to fill gaps in supply. Question 3 Learning Outcome 3 Question: Evaluate the use of reverse e-auctions, from both a buyer and a supplier perspective, as part of a strategic sourcing or category management process. Learning outcome addressed: 3.2 Mark 25 Marks Command word explanation: Evaluate calculate or judge the value of something Examples of good content/good approaches in answers: In a standard auction, buyers bid for the sellers items by offering increasingly higher prices and the winner is the buyer who has bid the most money, in a reverse auction the opposite happens. Here the seller offers the buyer lower prices and the winner is the seller who has offered the lowest price. An e-reverse auction is where the process is conducted electronically usually over the internet. Before undertaking a reverse e-auction, buyers must ensure that market analysis has been undertaken to ensure that the items required do not fall into a monopolistic or oligopoly market by using tools such as Porters Five Forces, as reverse e-auctions are best suited for the perfect competition market where there are lots of suppliers creating greater competition. It is also important for the buyer to undertake a price analysis of the required items, this is to ensure that bidders do not submit prices that are so low, it could result in the winning bidder being unable to supply or supply items that are sub-standard. It is important for the buyer to ensure that the specifications clearly state what is wanted and the quality standards required as the goods tend to be bought unseen. It is also important to ensure the bidders are pre- NOV16_AD4_EXAM REPORT _LEARNER_COMMUNITY_FV 5/10

6 qualified to ensure they have the means and finances to be able to supply you with the required items. There are also a number of different types of reverse auctions and the buyer will need to consider and evaluate the merits of each type to ensure the most suitable one is chosen to meet their particular requirement. The different types of reverse auction that could be used are: The bundled auction, where lots are bundled together. Dutch auction First to bid wins. Japanese auction after every bid sellers must confirm their willingness to stay in the auction at the current price, the winner is the last remaining bidder. Cherry picked bidders can pick what they want to bid for. Scorecard auction this is a complex process in which weighting is applied and bids can be shared with other bidders to drive competition. Benefits to the Buyer Obtain the lowest market price. Reduce time taken to undertake the reverse auctions compared to standing tendering processes. Easier to repeat with other products. Undertaken remotely open to the global market as it is undertaken using the internet so will increase the number of suppliers who take part in the auction. Open and transparent process, fully auditable. Drawbacks Lack of supplier participation - some suppliers have policies not to enter into reverse auctions. Goods/services unsuitable for being undertaken using reverse auction. Training of buyer/supplier to use e-reverse auction software is needed, if this is not properly undertaken it can lead to mistrust. Poor timing as reverse e-auctions are undertaken globally buyers need to take into account the different time zones and ensure that an appropriate time is chosen. Benefits to the seller Seller can see competitor s prices. It can open up opportunities to bid for new business normally unavailable to them. Reduces the seller s tendering costs. Able to react to the competitor s price changes. Reduced negotiation time. Drawbacks The customer is focused on price alone. Can lead seller to offer unaffordable prices to win the auction. Power fluctuations could lead seller to miss bidding opportunities (in certain parts of the world where power supplies are unstable). Computer equipment costs unaffordable to the seller. There is little or no supplier/buyer interactions which can develop into poor supplier relationships. Reduces long term competitiveness of the suppliers as they have no more to give. NOV16_AD4_EXAM REPORT _LEARNER_COMMUNITY_FV 6/10

7 Examples of content for merit/distinction grade answers: Better answers which managed to achieve merit passes and in some exceptional cases distinction grades, included a more in depth introduction on reverse auctions. Greater breadth and depth in the answers on the different type of auctions that could be used and more breadth and depth of knowledge on answers on the advantages and challenges for both the buyer and seller. Relevant examples of candidates own experiences were used to further explain and enhance answers given. Examples of poorer content/ poorer approaches in answers: Weaker answers tended to be very short in content, reverse and standard auctions were often mixed up and did not show a depth and breadth of knowledge on the subject. Concluding comment: Generally this was a well answered question providing knowledge of reverse e-auctions and how they can be applied to the benefit of both the buyer and seller and the challenges both could face, however it was also clear that some candidates did not understand what a reverse auction was and how it could be used. Question 4 Learning Outcome 4 Question: (a) Examine the benefits and challenges of benchmarking performance in supply chains. Mark 17 Marks Learning outcome addressed: 4.2 Command word explanation: Examine provide both a description and an explanation of something Examples of good content/good approaches in answers: Benchmarking can be defined as the process of comparing the business processes and performance with the best practice in the industry. The benefits are That it will lead to a better performing organisation. The organisation will need to look at its current processes and see how they compare with other similar organisations, and then make the relevant changes to improve. If it does not improve the organisation could become less competitive in the market place and could end up having to restructure and worse-case scenario they could go out of business. Benchmarking is a qualitative approach; it looks to gather information and then compare to find the gaps, and how to address them. The organisation can research innovative practice and processes and see if it can utilise these to its advantage, thereby if applied properly propelling them to become the best in their industry. A benefit to becoming best in the industry is that you will increase your market share, reduce your costs whilst improving your product and you would become more competitive. NOV16_AD4_EXAM REPORT _LEARNER_COMMUNITY_FV 7/10

8 However there are also challenges and these could include: Not being able to find anybody in the market to compare yourself with. Other companies may not wish to see you better yourself as you could become superior to them and more competitive causing them to lose business. Benchmarking is a backward looking process therefore you could be bringing in outdated practices into your organisation which could hinder rather than improve your situation. It could be cost prohibitive to undertake benchmarking; you might not have the relevant skilled people within the organisation so would have to hire expensive consultants to undertake the work for you. There might be a tendency to select easier areas to benchmark where the improvements are straightforward to achieve and therefore avoiding the more difficult and important areas where improvement will have a far greater and rewarding effect. Examples of content for merit/distinction grade answers: Better answers which managed to achieve merit passes and in some exceptional cases distinction grades, included a more in depth introduction and definition of Benchmarking. There was a higher number of both benefits and challenges and the answers were more detailed, candidates also provided relevant examples from their own experiences to enhance the answers on benefits and challenges involved in benchmarking. Examples of poorer content/ poorer approaches in answers: Weaker answers tended to be very short in content and demonstrated poor knowledge of the subject or they were related to the use of KPIs. Concluding comment: This was one of the most poorly answered questions in the paper and the majority of candidates did not obtain a pass mark. Future candidates should ensure that they read and understand what Benchmarking is and how it is applied, how improvement can be made, and what the challenges are likely to be. NOV16_AD4_EXAM REPORT _LEARNER_COMMUNITY_FV 8/10

9 Question 4 Learning Outcome 4 Question: (b) When measuring or benchmarking category performance in supply chains, metrics might be grouped into the following categories: Organisational metrics Purchasing process metrics Category specific metrics Relationship specific metrics. Identify TWO typical measurement areas in any TWO of the above metrics groups. Mark 8 Marks Learning outcome addressed: 4.2 Command word explanation: Identify mention items separately Examples of good content/good approaches in answers: Organisational Metrics. These might include: The number of full time employees per x amount of spend. Purchased spend as a percentage of operating costs. Purchased spend per purchaser. Total number of suppliers by category by legal entity. Number of non-procurement staff involved in procurement. Ratio of managers to staff. Purchasing Process Metrics. These might include: Average cost to process a purchase order through to delivery and payment. Third party spend per order. Average cost to process an invoice. Volume of straight through orders where no human intervention has been required. The level of compliant spend by category, supplier and order channel. Percentage of total spend covered by purchase orders. Category Specific Metrics These might include: Price per hour/unit/licence, etc. for goods or services delivered by the supplier compared with the sector average, competitor price point etc. Payment terms, service levels, guarantee periods. Number of suppliers as a percentage of category spend, contract coverage. Savings delivered (with the ability to track to the bottom line). Delivery compliance. NOV16_AD4_EXAM REPORT _LEARNER_COMMUNITY_FV 9/10

10 Environmental and corporate social responsibility. Relationship Specific Metrics These might include: Percentage of spend not transacted through procurement. Suppliers using procurement as the first point of call. Suppliers using the organisation as a best practice case study. Internal perception of the procurement function. Stakeholder utilisation of the commercial agreements. Usage of procurement tools and processes. Percentage of engagement of procurement early in the procurement cycle. Examples of content for merit/distinction grade answers: Better answers which managed to achieve merit passes or in exceptional cases distinction grades, would of included more depth and breadth in their answers, for example Percentage of spend not transacted through procurement suppliers, to understand off contract spend we would need to look at the total of spend through all our contracted suppliers and deduct this from the total spend figure then work out what percentage this is. It would therefore be advantageous if all spend could be broken down by department, as this would allow the organisation to target the departments that are going off contract and ascertain why. Better answers might also include that in reality it is important that all four areas are covered in depth because the combined analysis will provide a balanced view of overall procurement effectiveness. Examples of poorer content/ poorer approaches in answers: Weaker answers tended to mix up the metrics and put them under the wrong heading. NOV16_AD4_EXAM REPORT _LEARNER_COMMUNITY_FV 10/10

CIPS Exam Report for Learner Community:

CIPS Exam Report for Learner Community: Qualification: Advanced diploma in procurement and supply Unit: AD4 - Category management in P&S Exam series: July 2016 Each element of a question carries equal