LEVEL 4. Foundation Diploma in Purchasing and Supply. Senior Assessor s Examination Report. May 2010 Series

Transcription

1 Foundation Diploma in Purchasing and Supply Managing Purchasing and Supply Relationships L4-04 LEVEL 4 Senior Assessor s Examination Report May 2010 Series

2 SECTION A Q1 Classify and describe each of the THREE relationships that exist in the case. (25 marks) Analysis of the Question The aim of this question is to test the candidate s knowledge of the classification and description of possible relationships in the supply chain as depicted in the case study. Fred, the retail buyer, takes an adversarial approach to purchasing. For him it is the deal that matters and not the relationship. This is summed up in his phrase, If we get on OK with a supplier then that s a bonus. This remark suggests that he really does not much care for suppliers and the relationship is unimportant. This is further illustrated by the emphasis on contracts. Here he wants to ensure that his contract terms are the ones that will apply and also, when he wants to change them, this is not done by negotiation, but by coercion. Why Fred acts this way is open to question. His motives may be in line with both the industry in which he works and the company that employs him. Equally, he could be acting on his own initiative but this is unlikely considering his comment on the instructions he receives from his boss through the use of market power. Anne, from automotive manufacturing has quite a different take on her situation. Her ideas are in tune with the Lamming s (Beyond Contract, 1997) view which suggests that, although contracts have their advantages, the emphasis should be on appropriate partnership relationships between members of supply chains and that these can become a source of competitive advantage. Anne s illustration of delegates working together to solve problems is an apt analogy. This ties in nicely with what we know about lean supply and its implications for relationships. To make the move towards lean supply ideas, the development of good relationships is a pre-requisite as the concept relies on transparency, openness and the willingness to sacrifice present advantage by expediency for long-term and shared gain. The culture in her industry is one of creating advantage through strategic supply chain management on a worldwide basis. The industry is globalised with a few large players chasing too few customers. This means ruthless attention to design, manufacturing and supply to leverage cost efficiencies. George, the local government delegate faces constraints peculiar to the public sector. Transparency and accountability are important when spending public money. Ensuring that suppliers get fairly treated is a policy priority at the highest level and has become a strategy in securing value for money. Relationships with suppliers tend to be shorter lived than in the private sector as contracts cannot be automatically renewed on expiry. During the course of public sector contracts the development of good working relationships will benefit both parties but the potential is limited. Relationship building activities such as golf and other corporate events have become a thing of the past in the public sector as anything which can be viewed as unfair advantage for suppliers is ruled out. Public sector buyers have not only to do the right thing but need to be seen doing the right thing. L4-04/SA report/may10 2

3 Exam Question Summary This was reasonably well answered by most candidates who were able to identify the three relationships described in the case. Some candidates suggested near relationship alternatives to those given above and, where these suggestions were backed by appropriate argument, marks were gained. Marks were also gained for the application of the supplier positioning model which a number of candidates included. Poorer answers either failed to draw on the evidence cited in the case or limited their answers to the mere identification of the relationship without any explanation, justification or analysis. Q2 (a) Q2 (b) Discuss FIVE constraints a public sector buyer, such as George establishing and maintaining relationships with suppliers. Explain Anne s need for close working relationships in a lean and agile working environment. (15 marks) (10 marks) Analysis of the Question The aim of part (a) and part (b) of this question was to test the candidate s knowledge of the constraints of supplier selection within the public sector and the effects of lean and agile supply on the relationships described in the case. For part (a) there are many constraints on public sector buyers and some of the following could have been discussed in the answer: The procedures take time, whether above or below the EU thresholds and may reduce responsiveness to urgent needs. Equally, the public sector may not be able to take advantage of short-term market conditions no matter how favourable, thus relationship opportunities may be lost. The cost and time of putting together the tendering documentation, administering the tender process, receiving the bids and evaluating them will give the impression to suppliers that any relationship with the public sector is bound to be very formal. The perception by suppliers that price is the main determinant of winning a tender may compromise quality and other important aspects (such as relationships) of a potential contract. Scope for negotiation and achieving extra value for money is extremely limited. Whereas negotiation may create an opportunity to establish relationships, lack of communication will tend to have the opposite effect. Good contract performance by suppliers is no guarantee whatsoever of being awarded further work which may have to be re-tendered. Under such circumstances parties will be reluctant to invest the necessary resource to create relationships. Only very large suppliers may be in a position to bid for contracts and it may be more difficult to establish and maintain relationships with large suppliers. Contracts with the public sector are open to scrutiny; they must be seen to be transparent which is counter to the ethos of many private sector organisations and this may constrain the formation of relationships. For part (b) the importance of establishing appropriate supply relationships became paramount with the introduction of lean methods. As the competitiveness of the supply chain depends on all its participants, it is important that they collaborate to reduce L4-04/SA report/may10 3

4 unnecessary waste. This means eliminating stocks where possible, producing only goods that are ordered by customers, focussing on customer value, removing layers in organisations to speed up the communication process, introducing continuous improvements, working towards producing batches of one and getting component and product right first time, every time. All this means that suppliers must be selected on different criteria, they become strategic, and their expertise is recognised and exploited and they are rewarded with long or very long-term and secure contract arrangements. Exam Question Summary In part (a) the majority of candidates were able to identify the five constraints faced by public sector buyers and, indeed two were contained in the case study text. Those candidates who explained why the various factors such as the need for transparency was a constraint on public sector buyer behaviour earned very high marks for this part of the question. Inadequate answers did not give enough explanation or were factually incorrect. A few candidates achieved the full 15 marks while many earned 10 marks or over. In part (b) the responses were generally good with candidates well able to distinguish between lean and agile supply and discuss the implications for both on supplier-buyer relationships. Poorer responses sometimes included a detailed account of the features of both lean and agile supply without mentioning the implications (for which few marks could be gained) or failed to answer the question in sufficient depth. SECTION B Q3 (a) Explain when you would apply supplier appraisal and vendor rating. (5 marks) Q2 (b) Explain how supplier appraisal may affect the development of a relationship between the buyer and supplier. (20 marks) Analysis of the question The aims of these questions were to test the knowledge of the candidate in relation to the appropriate application of supplier appraisal and vendor rating and how, in particular the way in which the use of supplier appraisal might affect supplier relationships. For part (a) supplier appraisal is the assessment of potential suppliers prior to contract award with the object of predicting the supplier s performance in order to minimise risk. Vendor rating is the assessment of the supplier s performance in fulfilling a contract after its award. Thus supplier appraisal is applied when selecting a new supplier or where there has been a significant change in the status or constitution of a supplier and vendor rating is applied throughout the lifecycle of a contract with a supplier with the object of ensuring contract compliance. For part (b) an explanation was required of the various ways in which the conduct of a supplier appraisal exercise could impact upon supplier relationships. The following L4-04/SA report/may10 4

5 points could have formed a basis for the discussion: These are summarised as both positive and negative effects. Positive effects for the supplier: The supplier may learn more about us, the customer, and the nature of our requirements, in particular the personalities of our organisation and how to relate to them. Learning things that could be used to add value in our dealing with other customers. Suppliers can learn about their own organisation from an independent perspective, particularly a view of their strengths and weaknesses. Providing an opportunity for suppliers to sell their company and what it does for customers, the local community and other stakeholders. Suppliers are given the opportunity to win valuable business from us. Providing an opportunity to secure employment for suppliers and increase the motivation of their staff. If being appraised by an attractive customer, provides some reflected glory for the supplier. Negative aspects for the supplier: Cost and time of preparation both before, during and after the visit. Risk of the loss of confidential information. For example, when an advertising agency is being appraised by a potential client some of the creative ideas generated for the appraisal might be used by a competitor. Disruption to normal production or service provision while preparations are undertaken. Risk of being exploited by the customer. Only being there to make up the numbers Opportunity cost of the time spent. Exam Question Summary This was a popular question which attracted a large number of responses. It was generally well answered with most candidates clearly distinguishing between supplier appraisal and vendor rating in part (a) with many achieving the full 5 marks. Part (b) was answered extremely well by a number of candidates with the deployment of some excellent arguments centering on the ways in which supplier appraisal can be used in both a positive and negative way and with their consequent effects on relationships. Many candidates related supplier appraisal from their own working experience which is almost always a good way to earn marks. Poorer answers at the extreme failed to distinguish between the nature of the techniques in part (a) and gave scant attention to the relationship issues required in part (b). L4-04/SA report/may10 5

6 Q4 (a) Define reciprocal trading (5 marks) Q4 (b) Discuss FOUR effects reciprocal trading may have on supplier relationships (20 marks) Analysis of the Question This question aimed to test the knowledge of the candidate on the way in which reciprocal trading might impact on supplier relationships For part (a) reciprocal trading could be where one company of a group supplies another company in the same group in return for a similar trade in the opposite direction. It could also mean that two independent companies both buying and selling to each other but with the expectation of one or perhaps both parties that the decision to buy is based on the motivation of inducing the supplier to buy from us. For part (b) the four effects reciprocal trading may have on supplier relationships might include the following; Benefits to the relationships - If the reciprocal trade is taking place between two divisions of the same organisation the buyer may find it easier to deal in house. The buyer may know the seller personally, as a colleague or as a fellow professional and it is likely from the outset that relationships will be closer. As the organisation is pursuing the same set of objectives, costs will be lower due to a higher production output than might otherwise be the case and any disputes that may arise could be resolved more directly. Impact on internal relationships - The converse of this may also pertain. Relationships between sales and marketing and the buyer may be strained as the former take for granted continuing business with the latter. Service and quality may suffer as internal buyers will take a low priority over external sales. Silo mentalities within the respective functions may exacerbate this effect and disputes over transfer pricing (which may have been influenced by accounting issues) will further sour relationships. In addition, the buyer s role may be diminished to that of an order placer. Impact on the supply market - The supply market will prefer an equal opportunity for doing business with an organisation where dispute resolution should be more direct competition is open and fair. Reciprocal trading is sometimes neither and the supply market might view the internal relationship as anti-competitive. This is particularly so where transfer prices contain little or no profit element and thus are much lower than the open market price. Impact on intercompany or inter-divisional relationships - Sales and marketing are judged and often rewarded on the sales turnover achieved by their efforts. They are therefore motivated to maximise sales revenue. In selling to another division, or another company they may offer concessions if the inputs of one coincide with the outputs of the other. Thus the reciprocal trade may benefit one party more than the other. If both divisions and companies were to have a free hand in deciding on the optimum outcome the distortions would not appear and there would be fewer temptations for either unethical practice or sub-optimal deals. L4-04/SA report/may10 6

7 Exam Question Summary This was not a popular question and the responses ranged from the excellent to the very poor with very few in between. The former answers were evidently based on in-depth knowledge of the subject illustrated by personal experience of the practice and were at the distinction end of the marking spectrum. The latter appeared to be uncertain as to what the term meant and confused as to its practice. A minority of candidates were able to quote from the CIPS policy guidelines on the subject and gained commensurate marks. Q5 Explain how international trading risks may be managed by each of the following; (i) The use of agents (ii) Letters of credit (iii) Incoterms (iv) Local expertise (v) CSR policy (25 marks) Analysis of the Question This question aimed to test the candidate s knowledge of risk mitigation and management in international supply relationships in five specific areas. Both buyers and seller can appoint agents to deal on their behalf in a foreign country. Agents, who will charge a fee for their services provide local expertise in sourcing, appraising and negotiating with suppliers on behalf of their principal. The agent will need to be trustworthy and act in an ethical manner without a conflict of interest to secure the best possible deal for their client. In addition to their purchasing expertise agent will often adopt a contract management role on behalf of clients and may arrange logistics services too. The purpose of a letter of credit is to minimise the risk for both buyer and seller in international trade with regards to payment. The procedure is standardised and will involve the banks of both parties. There are many forms of credit in use, including revocable and irrevocable as the most common forms. The banks party to the transaction act as agents on behalf of the buyer and seller to ensure that evidence of the goods being delivered (often a bill of lading) matches the payment made to the supplier. These terms issued and revised periodically by the International Chamber of Commerce set out the obligations of both buyer and seller in an unambiguous way in a series of four groups of terms. The latest edition came into force on 1 st January Examples of the terms range from Ex-Works to DDP Delivered Duty Paid with intermediate terms such as FOB and CIF. The use of incoterms minimises the risk for both parties arising from misunderstandings as to who is responsible for what in regard to the transfer of ownership, cost and risk of goods in transit across international borders. L4-04/SA report/may10 7

8 The use of local expertise could range from the use of a local consultant to the employment of permanent local staff in a suitably located buying office. In order to understand both the local language and customs of the country a local buyer could prove invaluable as well in knowing the local supply market, local legislation and the ways in which it is customary to do business in the area. CSR policy covers the issue of integrity in business; it is aimed at supplementing the statutory obligations placed on both the behaviour of firms and individuals. Having a CSR policy and upholding it reduces reputational risk in the following areas: Environmental responsibility Human rights Equal opportunities Diversity Corporate governance Sustainability Ethics and ethical trading Biodiversity. Exam Question Summary This was an extremely popular question which was chosen by a large number of candidates who produced some very thorough and comprehensive answers which often went beyond the requirements of the question. Lots of examples were given in the better responses with personal experience often being quoted to good effect. Poorer answers either reflected a lack of time planning where candidates ran out of time on the last question attempted or insufficient knowledge over all five areas of the question. A certain amount of duplication in the answers under the headings of the use of agents and local expertise was deemed inevitable and, where this was present, marks were awarded. Q6 (a) Define supplier development (5 marks) Q6 (b) Discuss FOUR benefits of enhancing working relationships (20 marks) between buying and supplying organisations. Analysis of the Question This question aims to test the candidate s knowledge of supplier development and the way in which supplier development activity can improve supplier buyer relations. For part (a) supplier development is defined as: The process of helping suppliers to provide us with something that we need. It can take many forms including, goods, machinery, technical assistance, finance, improved technology or enhancing working relationships. For part (b) it is now recognised that having a legal agreement between buyer and seller is insufficient to ensure the right levels of performance from that supplier. Buyers now have the responsibility to motivate suppliers so that maximum value is L4-04/SA report/may10 8

9 obtained from the relationship. Buyer-supplier relationships are a two-way process and it is incumbent on both to become familiar with the other s business. The benefits of this for the supplier are less effort is required in selling and marketing which, in turn, frees up supplier time to concentrate on areas where cost savings may be achieved for both parties. Once an appropriate relationship is established with a supplier, quality, delivery and scheduling problems can be solved by mutual cooperation with opportunities for deepening the relationship. In financial terms, suppliers can be motivated to invest in research and development which frequently leads to lower costs. The need for the use multiple sourcing from the buying organisation is reduced if a few reliable suppliers are used instead. This saves the costs of tendering and the learning curve costs as yet another new supplier gets up to speed with the new arrangement. Long-term agreements also mean that the supplier s production costs fall as a result of the learning effect. This, in turn, gives scope for price reductions that will benefit the buyer. In psychological terms closer working relationships result in the building of trust between the parties. Trusting relationships lead to fewer mistakes (a cost saving) while, at the same time, making it easier to correct mistakes without rancour or recrimination. Exam Question Summary This was another popular question which attracted some very good answers. The majority of candidates gave a good definition of supplier development with many achieving the full five marks. Some confused supplier development with vendor rating or supplier appraisal for which no marks could be gained. Part (b) of the question was competently answered by many with better responses again drawing on personal experience to illustrate how relationships could be enhanced. APPENDIX: Syllabus matrix indicating the learning objectives of the syllabus unit content that each question is testing L4-04/SA report/may10 9

10 Question SECTION A SECTION B No Learning Ob a b c a b c a b c a b c a b c d e a b c 1 The context of relationships in supply chain management 1.1 x x Assessing and selecting relationships x 2.3 x 2.4 x 2.5 x x x Managing outsourced relationships Developing and managing relationships with suppliers x x x x x 4.6 x x Marks distribution by section L4-04/SA report/may10 10