Foundation Diploma in Purchasing and Supply MEASURING PURCHASING PERFORMANCE. L4-03/Mar10 LEVEL 4 MARKING SCHEME. March 2010 TCMR

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1 Foundation Diploma in Purchasing and Supply MEASURING PURCHASING PERFORMANCE L4-03/Mar10 LEVEL 4 MARKING SCHEME March 2010 TCMR

2 SECTION A You are strongly advised to read carefully and analyse the information in the case study before attempting to answer questions 1 and 2. THURLTON CASTLE MOTOR RACING (TCMR) The Organisation Thurlton Castle Motor Racing (TCMR), established in 1978, is a leisure service provider specialising in the provision of motor racing activities with small sports and rally cars. These activities include: 20 racing days each year - on each day, a series of races are staged with a typical attendance of 5,000 spectators. Driving experiences for members of the public, where they receive basic instruction on how to drive a small sports car or a rally car and are then given the opportunity to drive themselves. These are held two days a week on average. Corporate hospitality days where a company hires the facility for a day and staff and customers have the opportunity to drive cars. These are held on Fridays of most weeks. Exhibitions related to the motor industry, held two days every month on average. The Catering Function One of the key features of the success of TCMR is its catering facility. It has a main restaurant for spectators on racing days and participants on driving experience days. There are also 20 corporate hospitality boxes, which have a catering facility which is used on racing days and on corporate hospitality days. The sales turnover of the catering function was 1,500,000 in Until now, TCMR has had an in-house catering service operated by its own catering manager and supported by ten full-time staff, plus a variable number of casual staff who are employed and paid on a daily basis. However, this catering facility is proving to be costly, as there are some days during the year when there are no events and consequently few visitors, but the salaries of full-time staff still have to be paid. There have also been several complaints from corporate clients about the quality of food served and the standard of service. Outsourcing the Catering Function The board of directors has decided to outsource the catering service, in an attempt to reduce costs and improve the quality of provision. It has asked the general manager, Patricia Adams, to undertake research into potential suppliers. She has decided that there are two companies that might be worth considering: Events Management Ltd (EML) and Aspden Catering Ltd (ACL). One of the key selection criteria will be the financial viability of the supplier, and Patricia s research into the financial performance of the two companies has revealed the information shown in Table 1: L4-03/Mar10/TCMR/GB Page 2 of 10

3 EML ACL Current ratio 1.2:1 0.8:1 1.3:1 1.6:1 Acid test ratio 1.0:1 0.5:1 0.9:1 1.3:1 Operating profit percentage 12% 10% 22% 29% Return on capital employed 8% 7% 18% 24% Table 1: Information about the financial performance of EML and ACL Patricia s research has also revealed that EML is a medium-sized company, established in 1995, with a sales turnover of 18 million in 2009 and 220 full-time employees. It has nine other similar contracts, all providing outsourced catering services. It does not have a corporate social responsibility policy or a commitment to recycling. ACL is a relatively small company, with a sales turnover of 2 million in 2009 and 35 full-time employees. It has two similar contracts in place and is keen to expand its operations by securing this contract with TCMR. Established in 2004, it has a well documented corporate social responsibility policy and has a strong commitment to recycling. QUESTIONS The information in this case study is purely fictitious and has been prepared for assessment purposes only. Any resemblance to any real organisation or person is purely coincidental. Questions 1 and 2 relate to the case study and should be answered in the context of the information provided. Q1 (a) Describe the information needed to calculate the current ratio and explain its relevance to TCMR. (6 marks) Q1(a) MARK SCHEME To test candidates knowledge of the current ratio Syllabus Reference(s): 2.6 the information required from the balance sheet will be the current assets (stock, debtors and cash) and the current liabilities (creditors and bank overdraft) its relevance is that a current ratio greater than 1.0:1 indicates that the supplier is solvent (Up to 6 marks to be awarded for a description of the information needed to calculate the two liquidity ratios) Total 6 marks L4-03/Mar10/TCMR/GB Page 3 of 10

4 (b) Describe the information needed to calculate the return on capital employed. (3 marks) Q1(b) MARK SCHEME To test candidates knowledge of the performance ratio, return on capital employed Syllabus Reference(s): 2.6 The information needed will be the operating profit from the profit and loss account and long term loans and shareholder funds from the balance sheet (Up to 3 marks to be awarded for a description of the information needed to calculate the return on capital employed) Total 3 marks (c) Analyse the trends between 2008 and 2009 in the financial information given in Table 1 about EML and ACL. (16 marks) Q1(c) MARK SCHEME To test candidates understanding of the significance of trends in liquidity and profitability ratios Syllabus Reference(s): 2.6 answers should conclude that both of EML s current ratios have fallen. As both are now below 1.0:1, this could be a cause of concern as the company is no longer able to settle its current liabilities from its current assets. Good answers will offer some explanation of the possible causes conversely, ACL s two liquidity ratios have improved and are now ell above the critical level of 1.0:1. ACL can easily settle its current liabilities from its current assets. From a liquidity point of view, this company is more stable EML s profitability has also declined, with both the operating profit % and the return on capital employed decreasing. This is an indication of poorer performance ACL, on the other hand, has improved both of its profitability ratios, an indication that it is performing more efficiently (Up to 4 marks to be awarded for an analysis of each of the two types of ratio - liquidity and profitability for each of the two companies) Total 16 marks L4-03/Mar10/TCMR/GB Page 4 of 10

5 Q2 (a) Explain how TCMR can use each of the following to evaluate these two potential suppliers: (i) (ii) (iii) Capacity Commitment Cash (iv) Competence. (20 marks) Q2(a) MARK SCHEME To test candidates understanding of the tools used to evaluate potential suppliers Syllabus Reference(s): 2.4 Candidates should explain the meaning of each of the four measures and explain the significance of each in the process of evaluating potential suppliers. Information from the case study, to illustrate, must be used Capacity is the ability of a potential supplier to fulfil the order by having sufficient resources, including physical, human and financial resources. Its significance is that a supplier must have sufficient capacity, otherwise it will not be in a position to fulfil the order. From the case study, there is little doubt that EML has the capacity to handle this contract, because of its size. However, ACL is a small company and this contract would almost double its sales turnover. So there must be a question mark about whether it has the capacity Commitment is the attitude of the supplier to the customer s business and can be explained in terms of the supplier perception matrix, whether the customer is a core, develop, exploit or nuisance customer. If the supplier perceives the customer as core or develop there is likely to be a higher level of commitment. The significance is that the customer wants a supplier who is committed to the contract, to ensure that it is fulfilled. ACL would view TCMR as a core customer, whereas EML would view it as an exploit or develop customer Cash refers to the liquidity position of a supplier. The supplier must have sufficient cash to be able to fulfil the contract. A customer doesn t want a situation where the supplier becomes insolvent before the contract is completed. EML has a liquidity problem, demonstrated by the fact that its two liquidity ratios are below 1.0:1 and falling. ACL is in a relatively healthy cash position, with liquidity ratios higher than 1.0:1 and rising. Competence refers to the supplier s technical ability and experience to fulfil the contract. EML has been in business for thirteen years, whereas ACL has been operating for only four years. With no other evidence, it is likely that EML s experience would indicate that it is more competent (Up to 2 marks to be awarded for an accurate explanation of each of the four terms. The other 3 marks each to be awarded for an explanation of their significance and illustrations from the case study) Total 20 marks L4-03/Mar10/TCMR/GB Page 5 of 10

6 (b) Suggest which of the two suppliers should be awarded the contract to provide an outsourced catering service to TCMR and give reasons for your suggestion. (5 marks) Q2(b) MARK SCHEME To test candidates knowledge of supplier selection criteria Syllabus Reference(s): 2.4 It is possible that either of the companies could be awarded the contract If cash and commitment are the two most important criteria, the contract should be awarded to ACL If capacity and competence are the two most important criteria, the contract should be awarded to EML (Up to 5 marks to be awarded for a reasoned choice of one of the two companies) Total 5 marks L4-03/Mar10/TCMR/GB Page 6 of 10

7 SECTION B Answer TWO questions from section B. You are strongly advised to read carefully all the questions in section B before selecting TWO questions to answer. Q3 Describe, using examples, FIVE ways that information technology may be used to acquire data about purchasing and supply performance. (25 marks) Q3 MARK SCHEME To test candidates knowledge of how information technology can be used to acquire data about purchasing and supply performance Syllabus Reference(s): 1.6 The remit of this question is very wide and candidates could draw on their own work experience of textbook learning or studies to illustrate A starting point could have been to examine what is meant by supply chain performance. Candidates could have referred to supplier performance and buyer performance. Improving performance could be in terms of doing things at a lower cost (economy), making better use of resources (efficiency) or meeting objectives more consistently (effectiveness) Candidates might have referred to supplier and stock databases as examples. Either could be used to collect data about performance.. Other uses of IT which could have been described include stock movement and monitoring systems, point of sale data capture or delivery details For all uses of IT introduced into the answer, it was important that candidates fully described how they would measure performance and that examples to illustrate were introduced (Up to 5 marks to be awarded for each of five IT applications introduced, with an explanation of how they would measure performance) Total 25 marks L4-03/Mar10/TCMR/GB Page 7 of 10

8 Q4 (a) Discuss the term value-added in a purchasing and supply context. (7 marks) Q4(a) MARK SCHEME To test candidates understanding of the meaning of value-added Syllabus Reference(s): 1.2 Candidates should define value-added as an improvement in the organisation s profits through non price increasing activities. They could discuss a wide range of benefits and disadvantages arising from a reduction in inventory costs. These could include savings in storage costs, such as rent, depreciation costs, staff costs and administration costs. Disadvantages of reducing inventory costs include the possibility of stockouts or shortages, caused by the reduced amount of stock held. (Up to 7 marks to be awarded for a definition of the term value-added. Total 7 marks (b) Explain how the following solutions can add value in a purchasing and supply function: (i) Using consignment stock (6 marks) (ii) Extending payment terms (6 marks) (iii) Obtaining extended warranties. (6 marks) Q4(b) MARK SCHEME To test candidates knowledge of how value can be added in a purchasing and supply context Syllabus Reference(s): 1.2 Candidates should define consignment stock and explain how it differs from other forms of stockholding. The benefits should then be described, in terms of no cost of storage and fewer risks and easier administration. The main disadvantage is the likely higher cost of stocks In the case of extending payments to suppliers, there are also advantages and disadvantages. The advantage of extended payment terms is that cash is saved and interest charges are reduced, but there could be an adverse effect on supplier relationships. Extended warranty terms could lead to cost savings in that there is a longer period during which inputs can be replaced by suppliers. However, the cost is transferred to the supplier (Up to 6 marks to be awarded for a definition of each of the three terms and an explanation of how each will add value) Total 18 marks L4-03/Mar10/TCMR/GB Page 8 of 10

9 Q5 (a) Explain how the activities of an individual purchaser might contribute to the profitability of their organisation. (15 marks) Q5(a) MARK SCHEME To test candidates understanding of the role of a purchasing officer in the achievement of an organisation s objectives Syllabus Reference(s): 3.3 Candidates should explain that a purchasing department s objectives should be linked to the company s overall objectives If one of the company s objectives is to increase profits, the purchasing department could set objectives such as reducing costs, by switching suppliers, improving operational efficiency or improving stock holding. Another objective might be to contribute to increased sales by enhanced product features (Up to 15 marks to be awarded for an explanation of how an individual purchasing officer can contribute to the achievement of organisational objectives) Total 15 marks (b) Describe TWO performance targets that an organisation might set a purchaser to achieve increased profitability. (10 marks) Q5(b) MARK SCHEME To test candidates knowledge of performance targets in the achievement of organisational objectives Syllabus Reference(s): 3.3 Candidates could suggest appropriate quantitative performance measures such as cost savings, the number of contracts reviewed, stock turnover rates Candidates could also suggest qualitative performance measures, such as the improvement in relationships with suppliers and the extent to which a purchasing department has contributed to enhancing product features In the case of each performance target chosen, candidates must justify their choice by explaining how they will contribute to increased profitability (Up to 2 marks to be awarded for each of two appropriate performance targets identified, with a further 3 marks each for an explanation of how they would contribute to increased profitability) Total 10 marks L4-03/Mar10/TCMR/GB Page 9 of 10

10 Q6 (a) Explain the purpose of performance appraisals for a buyer. (10 marks) Q6(a) MARK SCHEME To test candidates knowledge of the purpose of performance appraisals Syllabus Reference(s): 3.2 Answers should explain the different types of performance appraisal, annual, ongoing and 360 degree Answers should then go on to explain that performance appraisals are held to review the performance of a buyer against targets set at the last appraisal. Over a period of time, the results may be used for a pay or promotion review Another purpose of the performance appraisal is to set targets for the time period up to the next scheduled review. From this, any training needed to support the buyer will be agreed (Up to 10 marks to be awarded for a detailed explanation of the purpose of performance appraisals) Total 10 marks (b) Discuss the benefits for an organisation of a well-managed and structured approach to measuring the performance of individual buyers. (15 marks) Q6(b) MARK SCHEME To test candidates understanding of the benefits to an organisation of a well structured approach to measuring the performance of buyers Syllabus Reference(s): 3.1 Answers should describe how individual purchasing performances can be measured, the types of measures that are appropriate, and how these measures can be monitored over time. Better answers will also describe the benefits of a proper system for staff appraisal that utilises these measures, and will outline what a well managed and structured appraisal system will look like. Answers should arrive at a positive conclusion, this being a discuss the benefits question; and should identify positive points such as good staff retention, higher morale and motivation for effective staff; faster identification of the shortcomings and training needs of weaker staff; more scope for the payment of individual bonuses; better motivation; better individual reward and advancement, etc. The disadvantages should also be introduced, with examples being the cost and time involved in implementing a well structured approach (Up to 15 marks to be awarded for a detailed discussion of the benefits of a well structured approach to measuring the performance of buyers) Total 15 marks END OF MARK SCHEME L4-03/Mar10/TCMR/GB Page 10 of 10