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: http://www.cips.org/en-gb/qualifications/study-support/ ) 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 An indication of candidate performance for the examination question Each question has a syllabus reference which highlights the learning objectives of the syllabus unit content that the question is testing. The unit content guides are available to download at the following link: http://www.cips.org/qualifications/about-cips-qualifications/cipsqualifications/ 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: http://www.supplymanagement.com/ L6-02/SA report/may12 2
SECTION A Q1 (a) Explain why McDonald s may be determined continuously to improve its social and environmental performance. (12 marks) The aim of this question was to test candidates understanding of social and environmental issues, and the benefits of improving CSR performance. The learning objective being tested was 5.5. Corporate social responsibility (CSR) refers to an organisation s commitment to conduct its business in a fair and ethical manner which has a positive impact on all stakeholders. It encompasses a number of principles relating to human rights, labour standards, the environment, and anti-corruption. EU and national government legislation is increasingly driving the need for organisations to consider social and environmental outcomes alongside their commercial goals. Customers are also more aware of the issues and are basing their purchase decisions on organisations' ethical credentials. Social and environmental issues are particularly relevant to McDonald s because it is large, powerful, high-profile organisation with a global presence. Poor publicity can have a detrimental effect on sales and profitability. There has been much discussion about the nutritional value of McDonald s food and its supply chain practices in the developing world. Incorporating corporate social responsibility principles into its policies allows McDonald s to counteract this negativity and to market itself as a good corporate citizen. It also acts as a means of differentiation. Recruiting and retaining staff may also be facilitated. Adhering to social and environmental principles can also save money, as demonstrated by the initiatives relating to energy conservation, reduced packaging, waste management, and green building design. McDonald s can make an economic case for improving its social and environmental performance in terms of costs, revenues and profits. Although it was acceptable to set the scene and to refer to specific initiatives, this question was primarily about the benefits of adopting CSR. A number of candidates merely copied out text from the case describing the actions that McDonald s have taken, rather than focus on the reasons why. Other candidates discussed altruistic benefits, but the main focus should have been on the business advantage to McDonald s. Some answers discussed the continuous improvement approach mentioned in the question, and this was given the relevant credit. However, the main focus should have been on identifying the benefits to McDonald s of improving its social and environmental performance. Q1 (b) Explain how McDonald s achieves integration throughout its supply chains and the benefits of doing so. (13 marks) L6-02/SA report/may12 3
The aim of this question was to test the candidate s knowledge of supply chain integration initiatives and their understanding of the benefits of adopting such an approach. The learning objective being tested was 4.2. McDonald s supply chains are global and fast-moving, therefore supply chain integration is fundamentally important. There should be consideration of internal integration between functions, upstream integration with suppliers, and downstream integration with restaurants and consumers. Physical flows, information flows, and finance flows should all be considered. There are a number of initiatives that could be discussed: customer focus groups, customer relationship management systems, vertical demand information systems linked through EDI, flatter hierarchies, cross-functional working, project teams, continuous improvement teams, supplier tiering, early supplier involvement, supplier development, and training and awareness programmes. The level of planning required and the degree of control exercised by McDonald s is demonstrated in the case. The use of strategic suppliers is also very important. The benefits of achieving integration throughout the supply chain are likely to be: more customer focus, better demand information, operational efficiency, flexibility and agility, an integrated response, better supplier input, better planning, and reduced product development times. This question is partly about integration initiatives and partly about benefits. Some candidates failed to address the benefits. In terms of the initiatives, supplier tiering and strategic relationships were mentioned, but how these lead to better integration was not covered in detail. Very few other initiatives were mentioned. Supply chain integration is a core aspect of this unit s syllabus, and the general level of understanding appears to be weak. Candidates should have demonstrated a robust understanding of supply chain integration and the benefits of achieving it. Q2 Examine how McDonald s may manage its different types of suppliers, using appropriate supply chain relationship and power theories. (25 marks) The aim of this question was to test candidates knowledge of different supplier relationship strategies, supply chain power theories, and their application of concepts to a case study situation. The learning objectives being tested were 5.4 and 6.2. L6-02/SA report/may12 4
McDonald s has three types of supplier: indirect suppliers, direct suppliers, and strategic suppliers. The type of relationship adopted with the indirect suppliers is likely to be that of adversarial. Adversarial relationship strategies are a market-based approach where the organisation competes with its suppliers in order to appropriate the commercial value of the relationship. The main focus is price. It is usually adopted where the organisation is in a dominant market position, where there is a competitive market, or where standardised items are purchased in a transactional way. McDonald s buys many standard items and ingredients from a myriad of smaller suppliers. This is a leverage purchase where McDonald s has the power. Power is derived from having something unique that differentiates the organisation and is difficult to replicate or substitute. This is achieved through utility, scarcity, information asymmetry, barriers to entry, or switching costs. Porter's five forces model is one way of demonstrating the power relationships in a supply chain. The power balance between supply chain players will determine the degree to which they can appropriate the value from the relationship and whether the value needs to be shared. In the case of the indirect suppliers, the supermarkets have power over the suppliers and therefore appropriate the value. Collaborative relationships are also adopted by McDonald s. Collaborative relationships are where the organisation works closely with its suppliers to increase functionality as well as reduce costs. The commercial value of the relationship is usually shared. The approach is usually adopted where there is a restricted market, where the two parties are interdependent, or where critical or strategic items are being purchased. This would be the situation in relation to McCain Foods and the fries supply chain. This is a strategic critical purchase where the buyer and the supplier have equal power in the relationship and therefore share the value in a collaborative way. The relationship approach adopted with the direct suppliers is likely to be that of adversarial collaborative. McDonald s collaborates with first-tier suppliers such as LEP at an operational level in order to achieve supply chain and logistical integration (essential in the fast food industry), but competes with them commercially in order to appropriate the value for themselves (subordination to the McDonald s system). Direct suppliers would need to innovate and differentiate themselves in order to increase their power in the supply chain and appropriate more value from the relationship. The answers to this question were generally weak. A number of candidates failed to differentiate between different types of relationships, focusing solely on partnerships. Many answers referred to purchasing portfolio analysis (Kraljic), but the understanding of how relationships link to this was patchy. The understanding of supply chain power was superficial. A greater level of understanding needs to be developed in these areas. Candidates should have demonstrated a robust understanding of supply chain relationship strategies and the concept of supply chain power in relation to the case study situation. L6-02/SA report/may12 5
SECTION B Q3(a) A Chinese power company is proposing to acquire a mining company in Namibia for the supply of raw materials. Evaluate the proposed acquisition from the perspective of both organisations. (10 marks) The aim of this question was to test candidates knowledge of company acquisitions and their ability to evaluate strategic options. The learning objective being tested was 1.5. An acquisition is where one organisation purchases a controlling stake in the other. This external growth strategy will enable the Chinese company to rapidly expand beyond its current situation without the need to develop internal resources. It is a form of backward integration in order to secure inputs from its supply markets. This is particularly important because the location of minerals is concentrated, demand is accelerating, and supply is finite. As well as securing sources of supply, the benefits to the Chinese company could include: the utilisation of specialist knowledge, sharing of resources, co-specialisation, and cost efficiencies. The benefits to the Namibian company could be access to new markets and technology transfer. Potential drawbacks could include: significant up-front investment, poor cultural fit, poor integration, and poor returns. Acquisitions are often driven by the egos of company CEOs rather than a rational business case. In the case of Chinese companies, the national government often dictates these strategies. Acquisitions are expensive and in most cases fail to deliver in terms of bottom-line performance. To make a merger or acquisition work there needs to be a clear strategic purpose, cultural compatibility, defined performance expectations in terms of goals, governance and responsibilities, simple and flexible organisational arrangements, integrity, openness, discretion, and consistency of behaviour. The answers to this question were generally good. However, some candidates failed to evaluate the strategy by looking at both its advantages and disadvantages. Candidates should have demonstrated a robust understanding of acquisitions in relation to the given context. Q3(b) Assess how the Chinese power company can ensure that its strategies will be implemented throughout the Namibian company if the acquisition takes place. (15 marks) L6-02/SA report/may12 6
The aim of this question was to test candidates knowledge of strategy implementation issues and change management approaches. The learning objectives being tested were 2.1, 2.2 and 2.3. The proposed acquisition will require radical change which is likely to meet with resistance. The business benefits will need to be explicitly demonstrated. The cultural paradigm of the organisation is likely to be affected and careful implementation will therefore be required. The vision and mission statements need to be clear, and corporate, business and functional plans drawn up. Strategy and structure should be aligned and appropriate staff, skills, styles and systems put in place. Restraining and facilitating forces should be identified and change management techniques incorporated. The use of change agents should be considered. Top management support is essential, and the CEO must demonstrate strong leadership and influencing skills to drive the changes. Reinforcement, monitoring and review of the chosen strategy must take place. A communications policy and process should be instigated which covers a number of communication channels and a range of different media. Individuals need to be incentivised to ensure that the acquisition succeeds. This can be achieved through personal development plans linked to a robust performance management system. Employees must buy into the strategy and be convinced of its message and benefits. This is perhaps the most difficult area to influence, as it is concerned with the values, norms and underlying beliefs of the organisation. Training interventions, awareness campaigns and socialisation processes should be adopted as enablers. The answers to this question were also generally strong. However, some candidates discussed the strategic analysis and choice stages, rather than focus on implementation aspects. Candidates should have demonstrated a robust understanding of implementation and change management issues. Q4 Conduct an in-depth PESTLE analysis for an organisation with which you are familiar (15 marks) and suggest corporate strategies to address the identified issues (10 marks). (25 marks) The aim of this question was to test the candidate s understanding of broad environment factors and their ability to undertake a PESTLE analysis. The learning objectives being tested were 1.3 and 1.7. L6-02/SA report/may12 7
A PESTLE analysis considers the broad environmental factors that impact on an organisation. The PESTLE acronym refers to the way of categorising the factors into the headings of political, economic, social, technological, legal, and ecological. It is important that candidates analyse the implications to the chosen organisation, rather than just identify a list of factors within each heading. The factors identified should be external challenges or opportunities outside the control of the organisation rather than internal issues. However, reference to the organisation s strengths and weaknesses in relation to the external issues may form part of the analysis. It is more important to assess the level of analysis, rather than be concerned about which category the identified issues are placed within. The corporate strategies that are suggested could be in the form of generic strategies, strategic directions, or strategic methods. They should be clearly linked to the issues identified and fully justified. Those candidates that understood the purpose of a PESTLE analysis and used it in a dynamic way scored very highly for this question. However, there were a number of responses that just listed factors without discussing the implications, included internal issues in the analysis, and clearly did not have a sufficiently detailed understanding of their chosen organisation s external environment. Lack of solutions and weak linkage between the analysis and the solutions were other concerns. Candidates should have demonstrated a robust analysis of the chosen organisation s broad environment and suggested appropriate strategies that addressed the identified challenges and opportunities. Q5 Demonstrate how procurement and supply chain strategies, processes and structures can add value to an organisation. (25 marks) The aim of this question was to test candidates understanding of how procurement and supply chain management can add value to an organisation. The learning objectives being tested were 3.3 and 3.4. Procurement and supply chain strategies can add value through cost reduction, standardisation, supplier performance improvement, supply chain integration, and innovation. A proactive procurement function will gain visibility over spend, align supply and demand through robust forecasting, planning and scheduling interventions, and instigate just-in-time systems for supplying goods. Strategic source planning should be carried out, a category management system adopted, relevant suppliers appraised and selected, and appropriate relationships adopted. Supply performance monitoring and relationship management are key on-going activities. L6-02/SA report/may12 8
The status of the procurement department needs to be advanced by appointing a senior management representative at board level, and by either developing internal capabilities or recruiting externally. Coordinating purchases across the whole organisation will enable the company to utilise its scale and achieve leverage over its suppliers. Common purchases should be centralised, and policies and procedures established to regulate the buying activities of decentralised activities. Procurement should be involved early in the specification process. Supply chain integration should be sought both internally and externally from the initial supplier to the end customer. Process improvement initiatives, cross-functional cooperation, integrated planning, forecasting and management information systems, and joint-working supplier initiatives should all be adopted. Careful planning of hub and spoke distribution systems is also essential. Procurement could also be involved in the boundary of the firm decision by identifying core and non-core activities and conducting insource/outsource analyses. Non-core activities should be outsourced. A cross-functional approach is essential, and the relevant costs, benefits, and risks need to be assessed carefully. Robust supplier selection, key performance indicators and service level agreements linked to effectively managed incentive contracts are essential requirements. Lean supply is another area where procurement can add value by driving waste eradication and efficiency improvements throughout the supply chain. Some candidates discussed the concepts of value and added value initially and this was acceptable. However, others spent a lot of time and effort drawing and discussing Porter s value chain without demonstrating how this related to the question. This was a poor use of time. Others discussed corporate strategies, rather than procurement and supply chain strategies. This was a fairly open question, but candidates should have demonstrated a robust understanding of how procurement and supply chain principles add value in terms of strategies, processes and structures. Q6(a) Forecasting demand accurately is often very difficult in supply chains. Assess the likely causes of demand variability (4 marks) and the means of managing it (8 marks). (12 marks) The aim of this question was to test the candidates knowledge of demand variability and demand management techniques. The learning objective being tested was 4.2. Some of the causes of demand variability that could be discussed are: seasonality, promotions, poor planning and scheduling, as well as changing demographics and economic factors. Variability in demand can lead to the bull-whip effect, where the variance in orders increases as one moves upstream in the supply chain. L6-02/SA report/may12 9
Behavioural causes can be mitigated by improving communication through cross-functional and inter-organisational integration. Non-behavioural causes can be managed by adopting sophisticated forecasting methods that do not rely solely on past data and take into consideration environmental changes, seasonality, order batching, and special events such as price promotions. Operational systems should also be flexible and responsive, and robust planning methodologies and capacity management techniques adopted. Specific initiatives that can be implemented to manage variability of demand are: customer focus groups, customer relationship management systems, vertical demand information systems linked through EDI, flatter hierarchies, cross-functional working, project teams, continuous improvement teams, early supplier involvement, and training and awareness programmes. This question was related to the operational aspects of matching supply with demand. Therefore, candidates who discussed growth strategies, strategic directions, and strategic drift were not credited. Most answers, however, demonstrated a sufficient understanding of the relevant issues. Candidates should have demonstrated a robust understanding of the causes of demand variability and the initiatives that can be adopted to manage the phenomenon. Q6(b) Demonstrate how core competence thinking can inform the strategic make-or-buy decision-making process. (13 marks) The aim of this question was to test the candidates knowledge of core competence thinking and how core competence thinking informs the strategic make/buy decision-making process. Core competence thinking dictates that an organisation concentrates on the activities and processes that enable it to achieve sustainable competitive advantage and outsources everything else. These activities and processes are likely to be unique, durable, nonsubstitutable, and difficult for competitors to imitate. They are the means of differentiation for the organisation that must be preserved and deployed. Organisations need to identify their core, complementary and residual resources, and feed this information into the strategic make/buy decision-making process. Core competences should remain in-house because they enable an organisation to achieve sustainable competitive advantage and are not to be trusted to outside organisations. Complimentary competences directly support core competences and should be outsourced only to a strategic supplier within a close collaborative relationship. A partnership-type relationship can become a core competence in itself over time. Residual competences are non-core and can therefore be outsourced using a leveraged, marketbased approach and arms-length relationships. L6-02/SA report/may12 10
Most candidates were proficient in answering this question. The stronger answers differentiated between the three types of competences and the relevant relationships required to manage them. Candidates should have demonstrated a robust understanding core competence analysis and how it informs the strategic make/buy decision-making process. APPENDIX: Syllabus matrix indicating the learning objectives of the syllabus unit content that each question is testing L6-02/SA report/may12 11
L6-02/SA report/may12 12