LEVEL 4. Foundation Diploma in Purchasing and Supply. Senior Assessor s Report. May Measuring Purchasing Performance L4-03

Transcription

1 Foundation Diploma in Purchasing and Supply Measuring Purchasing Performance L4-03 LEVEL 4 Senior Assessor s Report May 2009 L4-03/SA report/may

2 SECTION A Question 1 (25 marks) Part (a) (20 Marks) Using the information provided in Table 1, comment on the trends between the two years for each of the suppliers of doors. The case study featured the Nova Construction Company Ltd (NCC), which had encountered a supply problem. It had previously purchased its doors from Classic Timber Products Ltd, but this company had gone into liquidation because of cash flow problems. NCC had identified three potential new suppliers and Table 1 contained information about their liquidity and profitability ratios. Answers were expected to comment on the trends exhibited by the three suppliers for each of the four ratios. An ideal current ratio should be greater than 1.0, ideally around 1.5 and that the acid test ratio should be as close to 1.0 as possible, with the reasons for this The operating profit percentage and the return on capital employed should be as high as possible. The higher they are, the more efficient the company. They should relate this to the information given in the case study. The only one of the three potential suppliers which has acceptable liquidity ratios is National Door Supplies PLC. Its current ratio has increased from 1.3 to 1.5 between 2007 and 2008, indicating that it can easily settle its current liabilities from its current assets, if called upon to do so. Its acid test ratio has also increased, from 1.1 to 1.2, indicating that it can settle its current liabilities from its cash and debtors. Although Premium Doors Ltd had an acceptable current ratio in 2007, at 1.1, this has worsened to 0.7. Similarly its acid test ratio has decreased from 0.8 to 0.5 and it will not be in a position to settle its current liabilities. Although both the current ratio and acid test ratio of Lo-Cost Timber Products Ltd have remained constant, both are inadequate National Door Supplies PLC is the most efficient of the three, with its operating profit rising from 27.1% to 29.2% and its return on capital employed rising from 23.2% to 24.7%. Lo-Cost Timber Products Ltd also has increasing profitability percentages, with operating profit rising from 21.5% to 22.6% and return on capital employed rising from 18.6% to 19.4% Premium Doors Ltd, however, shows a deteriorating profitability position, with operating profit falling from 15.6% to 10.3% and return on capital employed falling from 11.4% to 8.9%. This question was generally well answered, with most candidates demonstrating a good understanding of the significance of the four ratios. Some, however, described the trends with no explanation of the ideal ratios and their significance. L4-03/SA report/may

3 Part (b) (5 Marks) Explain which of the suppliers is least likely to experience cash flow problems. As a result of the fact that NCC had lost its previous supplier, because of cash flow problems, this would be a critical factor in selecting a new supplier. Candidates were required to use the liquidity ratios provided in Table 1 to make a decision. The correct answer was National Door Suppliers PLC. This was the only one of the three suppliers that had a current ratio and acid test ratio greater than 1.0 in each of the two years. Also, there was an increasing trend between the two years for both ratios. Again, this question was generally answered well, with the majority of candidates choosing the correct company and giving relevant reasons for their decision. A minority of candidates, however, did not understand the question and chose an inappropriate company. Question 2 (25 Marks) Describe FIVE non-financial criteria which will be used by NCC when appraising potential suppliers. This question followed on from question 1, it required candidates to demonstrate an understanding of the financial criteria used to appraise potential suppliers. It was specifically about non-financial criteria. Answers were expected to describe five non-financial criteria NCC might use when appraising potential suppliers from the information in the case study. Answers might describe: Capacity - having the resources, financial, human and physical, to supply the doors required by NCC. There are comments within the case to indicate National Doors is the largest company and Lo-Cost Timber the smallest. Commitment - the extent to which the supplier values NCC s business and the measures they will take to ensure that orders are fulfilled. Competence - the abilities of the supplier, in terms of skilled personnel, appropriate capital equipment and experience. Consistency - as supplying goods of the required quality all the time, with no variations. Control - the supplier has systems in place to ensure that agreed objectives have been achieved. Answers should then relate each of these performance measures to each of the three potential suppliers: L4-03/SA report/may

4 National Door Supplies PLC has the capacity, as NCC s order would be less than 2% of its business. It is likely that it would be competent and consistent but because this is a small amount of its business, it may not be committed Premium Doors Ltd is a medium-sized company and NCC s contract would be about 25% of its business. Probably it has the capacity to fulfil the contract and it is likely to be more committed because of the size of the business and the fact that it is located in the same region. Lo-Cost Timber Products is a local company and a contract with NCC would double its sales. Commitment is likely to be high, therefore. But there are issues about capacity and competence, because of its small size. The quality of the answers provided for this question was mixed. Some answers were of a high standard, with candidates selecting five relevant criteria, explaining their significance and relating them to the suppliers identified in the case study. Some attained limited marks, because although the candidates had identified and explained five relevant criteria, no attempt was made to relate them to the three companies. Some gained low marks because candidates selected post-contract award criteria, such as the Five Rights of Purchasing, while the question specifically stated that the criteria chosen should be to appraise potential suppliers. A minority of candidates introduced financial criteria, such as cost, cash and price, while the question specifically asked for non-financial criteria. The answers of a few candidates focussed on methods of appraising potential suppliers, such as site visits, questionnaires and references; such answers achieved few marks. L4-03/SA report/may

5 SECTION B Question 3 (25 Marks) Part (a) (10 Marks) Explain TWO methods of analysing the training needs of buyers. Candidates were required to identify and explain any two methods of analysing the training needs of buyers. They could use their own experience in the workplace or their textbook studies as a basis for their answers. Answers were required to explain two methods that can be used to establish the training needs of buyers. Examples include job performance appraisals, work achievements measured against personal or organisational objectives, measuring performance or carrying out tests. For each of the two methods chosen, candidates were required to explain their meaning and how they would reveal buyers training needs. This question was generally answered well. The majority of candidates were able to identify two relevant methods of analysing training needs, although the answers of some candidates lacked depth and did not explain how they would identify training needs. Part (b) (15 Marks) Describe THREE performance targets that might be applied to buyers following an appraisal. Candidates were required to describe any three performance targets that might be applied to a buyer following an appraisal. Again, they could have used their own experience in the workplace or their textbook studies, as the basis of their answers. The following are examples of the type of targets that might have been set: candidates could describe qualitative or quantitative measures qualitative measures of a buyer s performance might include establishing and maintaining effective relationships with suppliers or the ability to work as part of a purchasing team quantitative measures of a buyer s performance could include the number of orders processed over a given period of time or the time taken to respond to queries or requests from internal customers, cost savings or reducing stock held, or reducing the supplier base. In the case of both qualitative and quantitative performance measures, answers were expected to describe why they are important and why they would result in improved organisational efficiency. Again, answers were generally good and most candidates were able to introduce three relevant performance targets. Some answers lacked depth and did not explain how the L4-03/SA report/may

6 targets would improve performance and the significance of this for the organisation. A few answers concentrated on the SMART acronym, which did not address the question set. Question 4 (25 Marks) Explain how a purchasing and supply department can reduce inventory costs by improving: (i) Economy (8 Marks) (ii) Efficiency (8 Marks) (iii) Effectiveness (9 Marks) The question required candidates firstly to define each of the three terms and then to explain how each can lead to a reduction in inventory costs. Each section of the answer could have started by defining the terms, economy, efficiency, and effectiveness. Answers were then expected to explain how each of the three methods can reduce inventory costs: (i) (ii) (iii) The key points that must be made are that economy is doing things for the lowest possible cost Examples of how economy could result in lower inventory costs might be the introduction of a just-in-time system or using consignment stocks. Efficiency is the process of achieving the lowest possible wholelife costs and maximising the use of resources. Examples of how efficiency might lead to lower inventory costs might include the use of e-procurement to ensure that there is no under stocking or over stocking or again through a just-in-time system. Effectiveness involves re-evaluating and re-designing entire processes to ensure that we are doing the right things and that objectives are being met Examples of how improved effectiveness could result in lower inventory costs might include the achievement of objectives such as faster stock turnover rates or the setting up of a consignment stock system. Each of the three methods should be applied to holding inventory with an explanation of how each can lead to a reduction in costs. Answers which briefly described the nature of inventory costs at some stage gained appropriate marks. Most of the candidates who answered this question were able to provide good definitions of the three terms. Some went on to explain how inventory costs could be reduced, resulting in good answers. Some responses however, did not deal with this part of the question and as a result attained only limited marks. L4-03/SA report/may

7 Question 5 (25 Marks) Part (a) (10 Marks) Explain how the development of a buyer s knowledge, expertise and skills will improve the buyer s job performance. In this part of the question, candidates were required to concentrate on the buyer s job performance and explain how the development of knowledge, expertise and skills would improve this. Answers could have included the following: As a result of the buyer s knowledge, expertise and skills being developed, the buyer will become more confident and better motivated. The buyer will have a better understanding of purchasing processes, such as contract formation and management, negotiating and managing relationships, both internal and external, resulting in improved job satisfaction. The buyer might also potentially benefit through improved pay and salary packages and ultimately promotion to a higher level within the organisation. This would result in greater commitment and improved job performance. This question was generally answered well and many candidates were achieved high marks. Part (b) (15 Marks) Explain how the development of an individual buyer s knowledge, expertise and skills will enhance the buying organisation s competitive advantage. In this part of the question, candidates were required to focus on the same issue of the development of a buyer s skills, knowledge and expertise, but were expected to explain how it would improve the organisation s competitive advantage. Answers were expected to present a convincing case for the employer to support development of a buyer s skills and expertise on the basis that a competitive advantage will be gained. Again, there are many reasons that could be brought forward, and all convincing reasons should attract marks. Likely grounds would be that the extra skills and abilities will pay for themselves quickly - and potentially many times over - in better deals achieved by the buyer for the organisation; prices re-negotiated downwards leading to cost savings for the organisation, better services achieved for internal/external customers by the buyer, benefiting organisational efficiency. This will lead to improving the employer s competitive advantage over its rivals. L4-03/SA report/may

8 Answers could also have introduced qualitative aspects, such as purchasing officers becoming better team players and improving relationships with internal customers and suppliers, which are likely to improve competitive advantage. There were many opportunities here for candidates to draw on their own work and everyday life experiences to come up with convincing arguments and evidence. There were a few good answers to this question. Many candidates, however, simply repeated the points made in part (a). Unless there was a clear explanation of how this would lead to improved competitive advantage for the organisation, as well as improving the buyer s performance, few marks were attained. Question 6 (25 Marks) Part (a) (7 Marks) In a purchasing and supply context, define the term value-added. Value-added may be defined as the achievement of financial savings or benefits that are not based on changes in unit price. Answers might consider how this can be achieved in a purchasing and supply context. Examples include: changing the specification of the product or service substituting lower cost inputs improving operational efficiency. There were a few very good answers to this question. However, many candidates, while providing a good generic definition of the term value-added, did not put it into a purchasing and supply context. Part (b) (18 Marks) Describe how each of the following might add value to an organisation: (i) (ii) (iii) Using consignment stock Extending payment and warranty terms Introducing an e-procurement system In this part of the question, candidates were required to apply the concept of valueadded and describe how each of the three solutions identified might add value. (i) Consignment stock is used in industries such as manufacturing and retailing. Stock is delivered by suppliers to the point of use. As the need arises, stock is issued and paid for. The system improves cash flow and reduces interest charges and reduces stock holding costs and risks, such as obsolescence. L4-03/SA report/may

9 (ii) (iii) Extending payment terms to suppliers means paying later, for example 45 days instead of 30 days. Again this improves cash flow and reduces interest charges. Extending warranty terms means that suppliers give longer guarantees on any inputs purchased and in the event of any faulty products; money will be saved because of the longer warranty period. E-procurement systems enable a wider range of suppliers to be located, with potentially lower costs. Inputs can be bought and paid for electronically. The main savings are time, as purchasing officers can procure inputs more quickly and space. There were some good answers to this question, with many candidates providing good definitions of the three terms and describing how they would achieve value-added. A minority of answers, however, were confined to definitions of the terms, without addressing the issue of how value-added might be achieved. L4-03/SA report/may

10 APPENDIX: Matrix indicating the learning objectives of the unit content that each question is testing L4-03 MEASURING PURCHASING PERFORMANCE SECTION A SECTION B Question No Learning Objective a b c a b c a b c a b c a b c a b c 1 Measuring and evaluating the performance of the purchasing and supply function x x x Measuring and evaluating the performance of the supplier x x x Measuring and evaluating the performance of the buyer x x 3.5 x x L4-03/SA report/may