CIPL4M1 Practice Material

L4M1 (D1)
1.
(a) Outline FIVE differences between purchasing goods and purchasing services.
(b) Explain any THREE of the ‘5 rights of procurement’ including how each might be achieved
(a) The major distinctions between goods and services are as follows:
• Goods are tangible, services are intangible: therefore, services cannot be measured,
weighed or otherwise inspected: an SLA is usually needed.
• Services cannot be separated from their supplier: goods can be delivered and stored before
they are required, whereas, services are produced and consumed simultaneously.
• Heterogeneity: goods are usually uniform in nature while services are unique at each
delivery because the personnel and circumstances are always different, making them
difficult to ‘standardise’.
• Services ‘perish’ immediately on delivery whereas goods can be stored until required.
Planning ahead is required so that the service is available when needed.
• Products are easier to specify, being tangible. Services are harder to prescribe because of
their intangible and heterogeneous nature.
• Ownership: services have no transfer of ownership making it difficult to define when a
service has been fulfilled and when risk and liability have passed from seller to buyer.
• Services require a higher level of human involvement and interaction especially services
carried out for people (e.g. travel services). Quality will depend, to some extent, on the
behaviour of the recipient as well as the service provider.
• Goods are usually purchased for immediate use whereas services may be purchased for long
periods of time.
(b) The ‘5 rights of procurement’ are quality, quantity, price, time and place and answers should
select any three of these. The importance of each is as follows:
• Quality: goods which are of satisfactory quality and fit for their intended purpose (2 marks)
e.g. ensuring an accurate specification of the requirement and its quality standards.
• Quantity: sufficient to meet demand and maintain service levels while minimising stock
holding (2 marks): e.g. by ensuring that there is accurate demand forecasting and efficient
inventory management.
• Place: goods delivered to the appropriate delivery point, packaged and transported so as to
secure their safe arrival in good condition (2 marks): e.g. by including transport instructions
including packaging requirements as part of purchase orders.
• Time: delivery of goods at the right time to meet demand, i.e. not too late but not so early
as to incur unnecessary inventory costs (2 marks): e.g. by ensuring accurate demand
management, placing orders in time for suppliers to provide timely delivery and ensuring
that suppliers are aware of delivery requirements.
• Price: securing all of the above at a reasonable, fair, competitive and affordable price.
Ideally, minimising procurement costs in order to maximise profit (2 marks): e.g. by carrying
out price and supplier cost analysis and/or by carrying out competitive tendering and
negotiation. The ‘right’ price is one that represents good value for money.
(a) Explain FOUR challenges for procurement when purchasing services due to their distinctive
features.
(b) Outline THREE circumstances in which an organisation might buy and hold items in stock
rather than buying them only when needed.
(a) These might have been:
• Intangibility; the fact that services cannot be weighed, measured or inspected before
purchase
• Inseparability; services are produced and consumed simultaneously
• Heterogeneity; services can vary according to the personnel performing them
• Perishability; services can't be stored for future use
• Ownership; the ownership of a service doesn't transfer and it is difficult to assess when risk
and liability have been passed on
(b) These might have included:
• Items that are critical to the production process and their unavailability would cause
disruption
• Seasonal items where holding items in stock would manage seasonal demand
• Items that increase in value over a period of time
• Where it is anticipated that the price of items will rise in the future
• If there are legal reasons why items have to be stored on site
(a) Define the term ‘stakeholder’ in relation to an organisation

(b) Describe the interests of TWO internal stakeholders of the procurement function
(c) Describe how the TWO internal stakeholders, identified in part (b), might contribute to
procurement activities
A) 'Stakeholder' is an individual or group who depend on the organisation to fulfil their goals and
upon whom the organisation depends. (Johnson and Scholes). There are two types of stakeholders -
internal and external.
• Directors or managers, whose interest include profitability, growth of the organisation and
the fulfilment of objectives
• Employees, whose interests include profitability and survival of the organisation, continued
employment, a healthy and safe working environment and fair and ethical treatment
• The manufacturing or operations function, whose interests include inputs being sourced at
the right price, of the right quality and quantity and delivered to the right place at the right
time. This would mean that they can maintain efficient flow of production
• The sales/marketing function, whose interests include quality, customisation and delivery
levels, so that customers are satisfied
• The finance function, whose interests include adherence to financial procedures,
notification of terms agreed with suppliers and support for cost control and/or cost
reduction
(c) should have focused on the two internal stakeholders selected in part (b) and described how
they might contribute to procurement activities. Examples might have included:
• Directors or managers have formal authority over planning, shaping the commitment and
motivation of staff and influencing through politics and networking
• Employees, who might contribute by giving a competitive edge and value-adding potential
through a skilled motivated performance
• Manufacturing or operations, who might contribute by providing an input to specifications
and by providing feedback on whether the five 'rights' of purchasing are being achieved
• The sales and marketing function might contribute by providing market research and
customer feedback information to influence product specifications and quality management
• The finance function might contribute by controlling or influencing budget allocations,
ensuring that suppliers are paid on time to maintain good supplier relationships
(a) Outline, using examples, FIVE elements of the total cost of ownership of capital equipment
(b) It is widely believed that it is important to attempt to reduce costs and add value throughout
the supply chain. Explain THREE innovative strategies that might achieve such goals
(a) These might have included:
• Pre-acquisition costs, such as research and tendering

• Acquisition costs, such as the purchase price, the cost of finance if borrowing is necessary,
delivery and installation
• Operating costs, for example labour and materials
• Maintenance costs, such as replacement parts and servicing
• Downtime costs, such as lost production
• End of life costs, such as decommissioning and disposal
• Value engineering, which is the process of analysing the value of a product at the design and
development stage
• Lean supply, which involves eliminating waste across the supply chain
• Agile supply, which involves collaborating closely with the supply chain to increase the
speed and flexibility of its response to changing customer needs
• Value-adding negotiations, which means collaborating closely with the supply chain to find
ways of improving processes and adding value, with mutual benefits to all partie
(a) Explain FIVE potential benefits of a supply chain management (SCM) approach to procurement
and supply
(b) Outline why supply chain management (SCM) may be unattractive for some organisations.
(a)
(b) a closer supplier relationship might not be appropriate if transactional purchases are involved,
there are risks associated with closer relationships such as complacency and loss of control over
confidential information.
Explain FIVE differences between operational expenditure and capital expenditure

These might have included:
• Operational expenditure items are financed from the organisation's revenue budget, while
capital expenditure items are financed by a capital account
• Operational items are usually purchased for short-term consumption, production or resale,
while capital items will be used over a long period of time
• Operational items tend to be of relatively low value, while capital items are usually high
value items
• Operational spends are less complex, repeat spends and once budgets are agreed, the
spend is managed by procurement or budget holders. Capital expenditure, on the other
hand, is complex and decisions around it will involve a range of stakeholders
• Operational expenditure is relatively straight forward and budgets are pre-set for regular
demand. Capital expenditure involves lengthy preparation work and may involve building a
business case, cost benefit analysis and considering options to buy or lease
• Capital items are fixed assets used to produce goods and services, whereas operational
items are bought to support operations/production and they may be used or transformed
before becoming a final product
• Capital items are procured less frequently and are usually strategic in nature, whereas
operational items are procured on a regular basis.
In the case of capital expenditure, these might have included buildings for manufacturing and
warehousing, machinery and vehicles. Examples of operational expenditure might have included
stocks of materials and components, maintenance and repair consumables and stationery
Explain the interests of FIVE connected or external stakeholders that a procurement function
might need to consider.
• Suppliers, who will look for an opportunity to develop the relationship and want to gain
future sales. Potential suppliers will expect a clear specification. Another requirement of
suppliers is to be paid a fair price and to be paid in accordance with contract terms
• Lenders or financial institutions, who supply finance for capital projects or overdrafts. They
would be interested in a suitable return on their investment and in the loan being repaid
• The local community might have expectations if a service might have an impact on it.
Examples include transport or pollution. It might also expect job opportunities from the
organisation
• Customers, who have an interest in receiving safe and satisfactory services or products that
represent value for money. Customers also influence procurement activity through their
demand and changing trends
• Shareholders, who are interested in governance and a return on their investment. They are
likely to be interested in a correct procurement process being adhered to and transparency
• The Government might have concerns about laws being adhered to and the generation of
taxes from the organisation's business activities. It might also be concerned about waste and
waste disposal
Explain the power and interest of FIVE different stakeholders of a procurement function using an
appropriate model.
This might have been as follows:
• Segment A (low power/low interest); examples of such stakeholders might be small

investors or large suppliers with which the organisation does only a small amount of
business. Because their power and interest are low, resources should not be wasted by
taking their interests or potential responses into account
• Segment B (low power/high interest); examples of such stakeholders might be small
suppliers, with which the organisation does a large amount of business, employees and the
local community. Because their interest is high, procurement should keep them informed of
its plans and any developments. For example the local community interest is a clean and
healthy environment and jobs. But, they have little power to change an organisation's
policies or decisions.
• Segment C (high power/low interest); examples of such stakeholders might be large
institutional investors, government agencies and regulatory bodies. Because their power is
high, procurement needs to keep them satisfied, so that they do not need to exert their
influence. For example large institutional investors have interest that procurement
contributes to higher profitability and increased dividends. Their power is to remove
directors from office or to sell their shares and withdraw from the organisation.
• Segment D (high power/high influence); examples might include major customers, key
suppliers and senior procurement managers. Because their power and interest are high, they
should be involved in procurement decisions so that their goals can be integrated into
organisational and procurement goals. For example key suppliers have interest in continuing
or increased business with the organisation and payment in line with contract terms. Their
power is to cease trading with the organisation, which might have serious consequences.
Part (a) Explain, with examples, the characteristics of each of the following purchasing categories:
(i) Commodities (ii) Goods for resale (iii) Maintenance, repair and operating (MRO) supplies.
(b) Outline FIVE circumstances where ‘buying for stock’ would be an appropriate procurement
policy
(a)
• Commodities are items that occur in nature. For example, coal, iron ore, cotton, tea,
insurance, metals, utilities and wheat (there are many more possibilities). They are
unequally distributed and experience price fluctuations. This may involve international
sourcing, currency exchange risks, transport risks, differences in legal jurisdictions.
• Goods for Resale are 'finished goods' that are sold on with little or no work carried out by
the purchasing organisation. Examples include products sold by supermarkets and those sold
by distributors). Characteristics include: Bottom line thinking, broad assortment, supplier
specifications, short feedback loop, and low technical complexity.
• MRO supplies: these are all goods and services necessary to transform raw materials and
components into end products - e.g. paints, lubricants, packing materials, etc. Characteristics
include large number of stock lines, quality problems or absence can stop a production line,
and MRO items are often stocked if critical.
(b) These might include:
• Where there is a long lead time, for example when buying from an overseas supplier
• Where items are critical for operations and running out of them would cause costly
disruption to the organisation, for example 'bottleneck' items
• Where there are legal requirements for holding items, for example health and safety
equipment
• Where items are likely to appreciate in value over time, for example fine wines and timber
• Where the price of the item is expected to rise and purchasing now and holding in stock
may result in cost savings
• Where demand for the item is seasonal and the buying organisation lacks the capacity to
deal with peaks in demand, for example Christmas cards
• Where buying in bulk might lead to economies of scale and cost savings, which outweigh
the storage costs
(a) Explain the importance of each of the 'five rights of procurement', outlining the added value
each might achieve for the procuring organisation.
(b) Explain ONE additional source, other than the 'five rights', of potential added value in
procurement and supply.
(a) This might have been done in the following way:
• The right quality means fitness for purpose and conformance to specification. This would
achieve added value because it ensures that the manufacturing process operates efficiently
to produce a finished good that satisfies customers, so they will place further orders. Also, it
avoids unnecessary costs of higher specifications or lower specifications which result in
reworks, complaints and claims
• The right quantity means that customer demands will be met on a timely basis. If the
quantity delivered is below requirements, customer demand might not be met. If it is above
requirements, storage costs will be incurred. Also, if the inputs are perishable, the wrong
quantity might result in deterioration
• The right place is important to ensure that production can take place on time. If goods are
delivered to the wrong place, there may be production delays and higher costs in
transporting goods to the place where they are needed
• The right time is important because on time delivery avoids production downtime and
unnecessary stockholding, which both involve additional costs
• The right price is one where both the supplier and procuring organisation make a profit. The
supplier will want to charge a price which covers costs, while the buyer will want to pay a
price which makes them competitive in the market. This will lead to increased sales and
increased profits, thereby adding value
(a) Explain TWO ways in which 'procurement' differs from 'purchasing'.

(b) Outline FIVE ways in which improving the quality of products can add value for an organisation
• Procurement is a wider, less limited term than purchasing. It can be defined as 'the process
of obtaining goods or services in any way, including purchasing, hiring or renting, leasing and
borrowing'. So, purchasing is part of the procurement process.
• Procurement embraces a broader process than purchasing. A purchase is sometimes
described in terms of the 'purchase-to-pay' cycle, whereas procurement includes activities
prior to and after purchasing. These include identification and definition of the need,
identifying potential suppliers, negotiation and the development of contracts. They could
also have included some of the stages after purchase, such as contract management,
supplier relationship management and dispute resolution.
• Procurement reflects a more proactive, relational, strategic and integrated role. Purchasing,
on the other hand is traditionally reactive, tactical and non-relational.
(b) These might have included reducing the need for appraisal and prevention activities, which saves
time and money, that the risk of failure is reduced and that improved quality will lead to an
improved brand image, which will result in increased sales and revenue. Other ways might have
included reducing the level of quality control, again saving time and money and less waste and re-
working.
• Improved quality can add value by reducing the need for appraisal and prevention activities,
which will save time and money.
• Improved quality will mean that the risk of failure is reduced. This should lead to a reduction
in losses incurred due to poor quality products reaching the consumer.
• Improved quality will result in fewer goods being rejected or having to be re-worked, which
will reduce costs for the organisation.
• Improved quality should improve brand image, resulting in more customers, increased
revenue and profits, which have the effect of adding value.
• Similarly, if an improvement in the quality of the product has improved the brand image,
customers are more likely to be loyal, resulting again in higher revenue and profits.
• Improved quality should mean that quality control measures can be reduced, thereby saving
costs
(a) Explain, with examples, the differences between direct and indirect procurement.
(b) Explain, in procurement terms, THREE distinctive features of services.
A) The main difference is that direct purchases are materials for production in a manufacturing
organisation, or goods for resale in a retail organisation. Typical examples include raw materials and
components for manufacturing, or computers and televisions for a retail organisation. Indirect
purchases, on the other hand, are items that support manufacturing or resale and examples include
marketing items, IT facilities, MRO supplies and stationery.
Another difference is that direct purchases have a direct impact on the organisation's operations,
whereas indirect purchases do not. If the cost of direct purchases is lowered, then the overall cost of
production is lowered, giving the organisation a competitive advantage and contributing to the
'bottom line'. While indirect purchases do not have the same impact on the cost of production, any
savings made will impact on the 'bottom line'.
Another referrece can include the differences in quality, stockholding and supplier relationships. The
strongest answers might have referred to Michael Porter's value chain model, which refers to direct
procurement as a primary revenue earning activity, whereas indirect procurement is referred to as a
support, or secondary activity.
B) These might have included the following
• Services are intangible, in that they can't be measured, weighed or analysed before
purchase, or when the satisfaction with the service is being assessed after purchase.
Evidence of satisfaction might come from look for other attributes such as Service Level
Agreement, price and convenience
• Services are inseparable, in that they are produced and consumed at the same time. The
efficiency and effectiveness of service delivery personnel and the service's processes are
crucial to the recipient's experience, so that procurement must get this right in selection and
evaluation
• Services are heterogeneous, in that whereas manufactured items tend to be uniform in
nature, services will vary because the personnel and circumstances differ. It is difficult to
standardise service specifications, so that recipients will be sure of what they receive. To
address this challenge, procurement will therefore have to develop specifications or service
level agreements.
• Services can't be stored for later use. As a result, the procurement function and suppliers
must plan ahead carefully, so that the service is available when needed and plan carefully to
get the availability and timing right
• Services do not result in a transfer of ownership. This makes it difficult when a service
contract has been fulfilled and when risk and liability have passed from one party to
another. Buyers should define requirements clearly in a Service Level Agreement and include
an agreed basis for charges
The main focus for procurement and supply is that value can be added either by cutting costs or
by securing operational efficiency. Describe FIVE methods through which value may be achieved
in procurement and supply using these approaches
• The use of value analysis, to eliminate non-essential features ; this technique involves
looking critically at the elements that make up a product or service and investigating
whether they are necessary
• Challenging user generated specifications, to minimise variety, stock proliferation and
overspecification, with costs being cut as a result
• Consolidating demand, by aggregating orders or forming a consortium, in order to lower
costs through bulk discounts or economies of scale
• Eliminating or reducing inventory, through systems such as JIT, to reduce the costs of
holding stock (explain more about costs of holding inventory)
• International sourcing, to take advantage of low-cost country production, although this
involves higher risks and higher costs, in terms of transport and possible taxes
• Negotiating with suppliers to reduce the cost of inputs
• Working with supply chain partners to minimise waste, with the technique of lean supply.
Explain, with examples, FIVE benefits of a supply chain management approach to procurement.
• Reduced costs by eliminating waste and implementing cost reduction programmes

throughout the supply chain. For example, this may involve eliminating activities that don't
add value
• Improved responsiveness to customers' requirements by emphasising the continuous flow
of value towards the end customer
• Access to complementary resources and capabilities, such as joint investment in research
and development and the sharing of technology and ideas
• Enhanced product and service quality through collaborative quality management,
continuous improvement programmes and enhanced supplier motivation
• Improved communication through increased information sharing and the integration of
systems; this should help to improve planning and coordination
• Sharing demand forecasting and planning information enables suppliers to produce only
what is required, when it is required; this would reduce inventory and the associated costs
• Faster lead times for product development and delivery means that new and modified
products can be offered in response to changing customer demand (agile supply)
2.
(a) Explain THREE circumstances in which a competitive tendering exercise might not be the best
approach to making a purchase
(b) Describe TWO e-sourcing tools and their use in procurement and supply
(a) These might be as follows and answers should explain any three:
• Urgency: tendering can take a long time and there may not be enough time to perform it
correctly. If potential suppliers rush to complete a quotation, it might lack accuracy or might
be ‘overpriced’ to cover unforeseen eventualities.
• Commercial confidentiality or national security (e.g. military organisations): tendering
confidentiality might be required. This would be difficult to achieve due to the ‘open’ nature
of most tendering processes and the need for many potential suppliers to be involved.
• Value of the purchase: if this is insufficient to justify the costs and time of tendering,
negotiating with one supplier might be better.
• Production costs cannot be measured accurately: an issue for potential suppliers but buyers
should be aware of typical production processes and if suppliers cannot estimate production
costs, the buyer should consider alternative ways of supplier selection.
• Price is not the only criterion for supplier selection and contract award. Service and the
supplier’s ability and willingness to contribute to cost reduction and design improvement
might also be important and tendering might not take account of it successfully.
• Tooling or set-up costs are major factors: these can add considerably to costs but here it
could be very difficult to make comparisons between different potential suppliers.
• Intellectual Property Rights and monopoly: these might prevent meaningful competition
because there is only one supplier. Candidates might explore how buyers can escape from
monopoly situations by e.g. avoiding branded goods, and seeking generic solutions based on
output/outcome specifications
(b) There is a range of e-sourcing tools available and answers should provide a description of any
two of these and their use in procurement and supply:
• E-catalogues: these can be viewed online or downloaded by purchasers. This can speed up
the location of potential suppliers as well as suitable products or services.
• Supplier portals and market exchanges: sites where multiple buyers/sellers share
information about requirements and offerings. Again, this can speed up the process of
supplier selection.
• E-tendering: involves using e-RFQs and specifications posted online or e-mailed to potential
suppliers. Bids can be received and evaluated electronically, speeding up tendering and
sourcing considerably.
• E-auctions, using the buyer’s or seller’s website, or third party auction sites: suppliers offer
goods online, and potential buyers bid competitively. Bids are ‘open’ so buyers may raise
their offers competitively during the auction. At the end of the bidding period, the highest
bid wins.
• Reverse auction: here the buyer specifies its requirements, and suppliers submit
competitive quotes. Bids are open, so suppliers may lower their prices competitively during
the auction. The lowest bid compliant with the specification wins.
• Online supplier evaluation data: (e.g.) third party reports, customer feedback, registers and
directories of approved or accredited suppliers, benchmarking reports, market intelligence
tools, etc. Thus, supplier appraisal (visits, etc.) would be speeded up considerably.
(a) Explain THREE ways in which electronic systems can be used in the sourcing process
(b) Describe FOUR ways in which added value may be created for a buying organisation through
an effective sourcing process
• E-requisitioning to suppliers for goods and services required.

• E-catalogues, published by suppliers - they make it possible to compare what different
suppliers are offering, by looking at product specifications and prices
• E-sourcing, the overall processing encompassing specifications, RFQ's and contract
development.
• Capturing supplier performance data.
• The use of e-mails, extranet or intranet. - emails speed up communication between the
buying organisation and suppliers.
• Suppliers are motivated and are prepared to work with the buying organisation to reduce
costs and add value.
• Suppliers are likely to want to share innovative approaches to add value.
• Suppliers are more likely to deliver products and services without defects, which reduces
the costs of rectification.
• Suppliers may add value by sharing development costs and providing co-investment.
• Suppliers are more likely to reduce lost time by providing timely tender bids,
documentation and deliveries.
• Suppliers are more likely to reduce wastage and add value by helping to identify
unnecessary processes and overstocking.
(a) Explain the activities that could be undertaken by an organisation to identify and appraise
potential suppliers as part of a sourcing process.
(b) Explain THREE activities that take place post contract award
(a) These should have included surveying and engaging the market, which involves identifying
potential suppliers through a range of methods. These might include the organisation's database
records, supplier catalogues, trade publications, trade fairs and exhibitions, or networking with other
procurement professionals. The next stage is to appraise the suppliers identified, to ensure that
suppliers will be able to perform the contract. This might be achieved by the Carter 10 C's model
(Competence, Capacity, Commitment, Control, Cash Resources, Consistency, Cost, Compatibility,
Compliance and Communication). A further stage might be a supplier audit or site visit, to confirm
information provided by a supplier in an appraisal questionnaire.
(b) Activities which might have been explained include:
• Expediting, which involves following up or chasing an order, perhaps by using an online

track and trace system
• Contract management, which is the process designed to ensure that both parties meet their
obligations and that the intended outcomes of the contract are delivered
• Supplier management, which are the activities involved in monitoring the performance of
the supplier and developing the supplier
• Contract termination, either when the contract is complete, or if one of the parties is in
breach of the contract terms
• Debriefing unsuccessful suppliers, following a tender process. This gives them the
opportunity to improve in the future
(a) Identify the main stages of a sourcing process (also known as the purchasing or procurement
cycle).
(b) Describe FOUR benefits of using electronic systems in the sourcing process
(a) These should have included:

• Identifying a need
• Describing the need in terms of a specification
• Developing contract terms
• Sourcing the market to identify suitable suppliers
• Appraising potential suppliers
• Inviting quotations or tenders
• Supplier selection
• Negotiating to improve terms
• Contract award
• Contract management
• Cost savings as processes are streamlined and speeded up

• Improved communication through the internal and external supply chains
• A higher degree of accuracy of data input, manipulation and transfer
• Reduced cycle and lead times as electronic systems are more responsive
• The availability of real time information, for example inventory levels or delivery progress to
support planning and decision making
• A reduced risk of fraud through fewer cash transactions
(a) Outline THREE pre contract award stages of the sourcing process
(b) Explain FOUR advantages for an organisation of following a structured sourcing process.
(a) Outline FIVE stages of the sourcing process.

(b) Describe THREE benefits to an organisation of following a structured sourcing process
(a) Identify FIVE stages of a generic sourcing process (procurement process), outlining the activity
at each of these stages
(b) Describe FIVE ways in which following a structured sourcing (procurement) process can add
value to an organisation.
Answers to part (a) would have identified five stages of a generic sourcing process. These might have
included:
• Identifying a need, which may be through a requisition or a Bill of Materials

• Specifying the need, which states the exact requirement to be satisfied by suppliers
• Developing contract terms, which describes exactly what the two or more parties have
agreed to do
• Sourcing the market, which means identifying or locating potential suppliers
• Appraising suppliers, a process which verifies whether a potential supplier will be able to
perform the contract
• Analysing quotations in order to select the most promising supplier, based on criteria such
as the Most Economically Advantageous Tender
• Negotiating best value, in order to improve aspects of the preferred tender
• Contract award, or issuing the relevant contract documentation to the selected supplier
(b) would have described five ways in which following a structured sourcing process can add value
to an organisation. These might have included:
• It ensures that all tasks have been performed, without any 'gaps', if this were not the case
and all tasks had not been performed, some re-working would be necessary to rectify
matters, with a cost to the organisation
• It ensures adequate coordination between parties collaborating in a process, with no
wasteful duplication of effort - such duplication would be a cost to the organisation
• It helps maintain consistency in processes and outcomes, as opposed to uncertainty of
doing things ad hoc
• It prevents conflicts and sub-optimal behaviour, where different participants pursue their
own interests and objectives
• It fosters efficiency, by mandating the most efficient method or procedure
• It supports good governance and managerial control by ensuring that adequate checks and
controls are in place
• It supports compliance with relevant standards, laws and regulation
• It supports the devolution of some procurement tasks to non-procurement staff, such as
users and budget holders
(a) Outline the potential impact of complex compliance requirements on the achievement of
positive outcomes in the sourcing process.
(b) Describe FIVE ways in which contract management might add value after the contract award
stage of the sourcing process.
(a) Organisations focused on process compliance can become rigid, inflexible and inwardly focused.
They tend to become resistant to change and incapable of adapting to the challenges of changing
competitive initiatives and customer demands. There is no attempt to seek to add value through
innovation and initiative. Organisations may become overly focused on target outcomes such as cost
reduction and profit maximisation at the expense of good practice and value adding processes. For
example, a short term focus on the lowest price might foster adversarial approaches to negotiations
and supplier relationships, which may in the long run miss out on value adding potential.
• Many of the value additions are achieved by how the buyer and supplier work together
after the contract has been awarded
• There is a higher likelihood of key decisions being made at the right time with the right
individuals involved
• There is less risk of misunderstanding and disagreements and a limited need to escalate
issues
• There is greater likelihood of identifying opportunities to deliver more value for money and
improved performance
• The contract manager can monitor supplier performance to ensure that KPIs or SLAs are
being achieved
• If the contract manager and supplier work together, there is more potential for innovation
and added value
Analysing the supply market is one of the key pre-contract stages in the sourcing process.
Part (a) Outline FIVE possible sources of information for finding potential suppliers at this stage of
the sourcing process.
(b) Explain THREE reasons for using a clear specification when defining needs as part of the
sourcing process
(a) Outline FIVE possible sources of information for finding potential suppliers at this stage of the
sourcing process.
b) Explain THREE reasons for using a clear specification when defining needs as part of the
sourcing process
(a) required a brief outline of five possible sources of information when finding potential suppliers
before the contract is made which might include:
• existing procurement database records of preferred, approved or authorised suppliers,

which have been used in the past
• Supplier catalogues, sales force presentations, and websites.
• Printed and web-based listings of suppliers and stockists
• Online market exchanges
• Trade or industry press and specialist procurement journals
• Trade fairs, exhibitions and conferences,
• Networking with other procurement professionals who may be willing to make
recommendations
• Expressions of Interest
• It encourages all relevant stakeholders to consider what they really need and whether this is
the only, cost-effective or most value adding solution
• It communicates the requirement clearly to the supplier so that they can conform to the
requirement and perhaps use their expertise to suggest innovative or lower cost solutions
• It minimises risk and costs associated with doubt, ambiguity or misunderstanding as to the
requirement
• It provides a means of evaluating the quality or conformance of the goods or services
supplied
(a) Outline THREE ways in which supplier selection may add value in the sourcing process.
(b) Describe FOUR uses of electronic systems in the sourcing process.
(a) These might have include:
• Poor suppliers are eliminated from the competition at an early stage, saving time and poor
performance, which might involve additional costs, later on
• It can help to ensure that procurement decisions are based on cost and value for money
criteria
• It can result in higher quality suppliers, who provide better value, particularly higher quality
products
• Innovation and creativity by suppliers are encouraged, to reduce costs and add value
• It will provide better data, which can be used to give feedback to unsuccessful suppliers, so
that they can improve future performance
(b) These might have include:
• E-catalogues, which are online catalogues, the equivalent of a supplier's printed catalogue
and which provide product specifications and cost information
• Automatic ordering, whereby orders are automatically generated when framework or
systems contracts have already been placed with approved suppliers
• E-contracting: electronic contracts can be transmitted to suppliers to enable the cutting and
pasting of standard contract terms and any variation of draft terms
• E-auctions, which can be used to speed up processes, enable suppliers in any location to
participate and drive down prices, all in a visible format with full audibility
• E-tendering, whereby an invitation to tender is published on the buyer's web portal, for
potential suppliers to view. Suppliers send bids, using secure e-mails and there may be a
facility for automatic evaluation of bids
• The internet, which can be used in the sourcing process to search for potential suppliers, on
a global basis
Describe FIVE sequential stages of a typical tendering process.

• An evaluation of the suitability of tendering as a procurement methodology, as compared to

other methods; different forms of tendering, such as selective or open, might have been
considered
• Identification of the need, which might be through a bill of materials or requisition
• The preparation of detailed specifications, to form part of the tender documents; different
types of specification, such as performance or conformance, might have been considered
• Determining a realistic timetable for the tender process, allowing a reasonable time for
responses at each stage
• The issue of the invitation to tender, accompanied by specifications; in the case of selective
tendering, this would be by means of an invitation to bid, while in the case of open
tendering, it would be by means of a public advertisement
• The submission of completed tenders or bids by potential suppliers, within the specified
deadlines
• Opening of tenders on the appointed date, while tenders received after this date should be
returned unopened; the tenders received should be logged, with the main details listed on
an analysis sheet
• Analysis of each tender, against the stated criteria, with a view to selecting the best offer;
this will usually be on the basis of the lowest price or the most economically advantageous
tender (MEAT)
• Award of the contract to the successful bidder and advertisement or notification of the
award
• De-briefing unsuccessful tenderers, to enable them to improve their competitiveness in
future bids
(a) Outline THREE functions which could be included in a Purchase to Pay (P2P) system
(b) Explain FOUR potential disadvantages of using electronic systems in the sourcing process.
(a) should have outlined three functions which could be included in a P2P system. These include:
• Tracking and tracing deliveries

• Expediting by exception
• Automated receipt and inspection, verifying delivery to trigger payment, authorisation and
automatic payment
• Capturing of supplier performance data, budgetary control and spend data
• Receipt of invoices, automated invoice matching and electronic invoice generation
• The generation of payment, by e-payments or fund transfers
(b) These include:
• High capital investment and set-up costs, which may be too great, especially for small
organisations
• High initial learning curve costs, for example the training of users and the cost of initial
errors
• Reliability issues, such as the risk of network breakdown, viruses and power failure
• Compatibility issues with suppliers; some suppliers may be located in countries with a less
developed infrastructure
• Some small suppliers, who do not have access to electronic systems, may be precluded from
doing business, even though they may have the capabilities
• Data security risks, arising from unauthorised or malicious access to data
• Supplier relationships may become transactional as personal contact and face-to-face
meetings are reduced
(a) Outline THREE benefits that may result from the use of electronic systems in the sourcing
process.
(b) Describe FOUR potential costs of using electronic systems in procurement and supply
• Cost savings, through streamlining and speeding up processes; examples include data input
and transfer and calculating
• Improved communication and transparency of information throughout the internal and
external supply chain, to support decision making
• Greater accuracy of data input, manipulation and transfer
• Reduced cycle and lead times, through streamlining procurement processes and more
accurate data for demand forecasting
• The high capital investment and set-up costs of the electronic systems, including hardware
and software items
• The high initial learning curve costs, where users of the electronic systems will have to be
trained to use them efficiently
• Possible costs arising from the failure of data security; this may be because of malicious
access to data or loss of data
• The cost of compatibility issues, because suppliers will have to invest in the necessary
technology to be able to work with their customers
• Possible redundancy costs, because electronic systems are faster and more efficient,
meaning that fewer staff will be required
(a) Explain THREE reasons why clearly defining needs adds value in the sourcing process.
b) Describe FOUR types of electronic system that can be used in the sourcing process.
(a) Answers might inclue:
• considering options of what is needed and why to ensure the most cost effective solution is
found,
• communicating requirements to suppliers to ensure the right quotations are received,
suppliers can also then suggest alternatives.
• risk is minimised if any ambiguity is removed and it provides a base to evaluate performance
and conformance.
• Standardisation, consistency and benchmarking are all possible
(b) internet, e-tendering (RFI/RFP/RFQ/RFX), e- catalogues, e-auctions and reverse auctions and
intranet
3.
(a) Explain the role of a shared services unit (SSU).

(b) A manufacturer of electrically powered tools for the engineering industry consists of four
separate business units, each of which undertakes its own purchasing activities.
Discuss THREE benefits of centralising all purchasing activities with those of retaining the present
decentralised structure.
(a) SSUs reflect a desire to centralise and share services (2 marks). The shared service provider
becomes a dedicated provider of services such as; finance, HR, IT and procurement (1 mark) which
continue to be provided internally (2 marks). An SSU manages costs and quality SLAs to
demonstrate value for money (2 marks). An SSU’s benefits may be summarised as:
• cost effective internal service;
• liaison with its customers;
• anticipating future demand;
• employing resources and providing higher levels of service more cost effectively than if they were
provided by a department or an external provider.
(b) ‘Centralisation’ and ‘decentralisation’ refer to the degree to which responsibility and authority is
delegated. Arguments for centralisation can only be evaluated in the context of specific
organisational environment and might include:
• Policies and procedures are easy to standardise and implement facilitating standardisation,
variety reduction and better value for money and minimising ‘maverick’ purchasing. Staff
training and development would be better organised.
• Consolidation of requirements: higher volumes could lead to savings based on economies of
scale. Location: If units are in different places, distance may hamper supply coordination.
Consistency is easier because of the single location.
• Supply market structure: if there is only a small number of suppliers a centralised
coordinated approach could facilitate a better negotiating position.
• Expertise required: expertise for buying the products and services required may suggest a
specialist buyer for each and a centralised approach. It could lead to a ‘category
management’ approach.
• Customer demands: Different customers may dictate which products must be purchased,
obstructing efforts aimed at coordination.
• The above is not intended as a definitive list and there are other arguments that could be
used in the comparison.
The benefits of retaining the present de-centralised structure include:
• Local responsibility: important where units are a long distance away from a central location
and/or where each unit’s requirements are specific.
• Knowledge of the local environment, culture and customer needs might give benefits to
local suppliers and the local economy.
• Skills development of buyers in each unit as there may be an element of local purchasing if
only for MRO items and facilities management.
• Better communication and coordination between procurement and operating departments,
• Customer focus: buyers are ‘closer’ to internal and external customers developing
understanding of user needs and problems.
• Quicker response to operational and user needs, environmental changes and problems by
local buyers close to the scene of operations.
• Smaller purchase quantities: sacrificing economies of scale, but reducing costs and risks of
holding inventory.
• Accountability: divisional managers can be held accountable for performance only if they
have genuine control over operations.
• Freeing central procurement units to focus on higher-level, value-adding tasks.
(a) Explain FOUR advantages for an organisation of adopting a centralised procurement structure.
(b) Explain the following IT systems used by the procurement or supply chain function: (i)
‘Enterprise Resource Planning’ (ii) ‘Materials Requirement Planning’ (iii) ‘Purchase to Pay (P2P)’

• Specialisation of procurement staff, whereby buyers can focus on a particular area and
develop their knowledge to a greater depth
• Potential for consolidation of requirements, so that buyers can obtain better prices through
bulk discounts and economies of scale
• Greater coordination of procurement activities; uniform procurement policies, procedures
and good practice can be introduced and applied facilitating standardisation, variety
reduction and better value for money
• Greater standardisation of specifications, which may enhance quality and efficiency. This
might be by reducing inventory and handling costs and improved quality management
• More effective control of procurement; procurement performance can be monitored and
compared to KPIs and budgetary control is improved
(b)
(i) Enterprise Resource Planning - ERP systems consolidate materials, manufacturing, logistics,
supply chain, sales and marketing, finance and HR planning into a single integrated management
system; a single database able to offer real time information for solving a range of business
problems.
(ii) Materials Requirement Planning - MRP is a set of logically related procedures, decision rules and
records for managing dependent demand items. It is designed to develop a Master Production
Schedule, from which a Bill of Materials can be derived. This is a breakdown of all the materials and
components required for production. It triggers requisitions and the procurement of appropriate
quantities at appropriate times.
(iii) Purchase to Pay (P2P) - P2P systems enable a two way flow of transactions to follow a contract
through to completion. It covers the raising of purchase orders, acknowledgement, expediting,
invoicing and payment.
(a) Explain THREE advantages to an organisation when adopting a devolved procurement

structure
(b) Describe FOUR benefits delivered to an organisation by an outsourced procurement function
(a) These might have included stronger communication and co-ordination between procurement
and operating departments, buyers being closer to internal and external stakeholders, quicker
response times to operational user needs and better relationships with local suppliers
(b) These might have included the freeing up of internal resources, access to expertise and
experience, the potential to aggregate demand and achieve economies of scale and greater
flexibility to adjust to peaks and troughs of procurement activity
(a) Explain what is meant by the term 'devolved procurement' in relation to procurement
structures.
(b) Outline FIVE disadvantages to an organisation of a devolved procurement function
(a) This might have been in terms of procurement responsibilities not being placed in the hands of a
single, centralised department. Instead, procurement responsibilities are given to procurement
officers in different divisions, strategic business units or user departments. In service organisations,
it is common for procurement to be carried out by users or budget holders, rather than by
procurement specialists.
• The staff involved may not be procurement specialists and procurement may be only a small
part of their work. As a result they will not have specialist skills or knowledge and may not
be able to select the best suppliers or monitor their performance
• It is likely that the consolidation of orders will not be possible, so that bulk discounts or
economies of scale are not achieved
• There may be less coordination of procurement activities and there may not be uniform
procurement policies and procedures, as there would be in a centralised function.
• There is likely to be less standardisation of specifications, possibly leading to reduced
quality and efficiency
• Conflict between different divisions or business units might arise, as they compete for
scarce raw materials and there may be unequal budgetary allocations of procurement
expenditure
• It may be more difficult to control procurement activities. When procurement is centralised
it is easier to monitor procurement performance and compare it to defined KPI's
(a) Define the term 'Corporate Governance'.

(b) Explain FOUR reasons why it is important to maintain effective governance standards within
the procurement function
a) Define the term 'Corporate Governance'.
b) Explain FOUR reasons why it is important to maintain effective governance standards within the
procurement function.
(a) Corporate Governance are the rules, policies, processes and organisational structures by which
organisations are operated, controlled and regulated, to ensure that they adhere to accepted ethical
standards, good practice, laws and regulations. The principles of Corporate Governance, may be
defined internally by the constitution, or Articles of Association, of the organisation, or that they
may be defined by external forces. Examples of this include government policy, law and regulations,
professional bodies, such as CIPS, which develop ethical codes and best practice frameworks, or
international bodies, such as the Ethical Trade Initiative and the International Labour Organisation
• Procurement professionals potentially control large sums of money and they are in a
position of trust within the organisation; they have a duty of care, which may be jeopardised
by unethical conduct
• Procurement professionals are faced by the opportunity to commit financial fraud or to
misuse systems or information for personal gain
• The decisions of procurement professionals typically benefit some suppliers over others.
This creates an incentive for suppliers to try to influence decisions, through bribery
• Procurement professionals are in a 'stewardship' role, responsible for finance and assets,
which are owned by other people. Unethical conduct may be represented by the theft, loss
or damage of assets, belonging to the owners of the organisation
• The reputation of the profession and the employing organisation may be damaged by fraud
or unethical conduct and enhanced by ethical conduct. Ethical standards are therefore an
important element in managing reputational risk
• Supply chain relationships may be damaged by unethical conduct. Ethical practices are
therefore an important element in procurement professionals maintaining a good status
with suppliers
(a) Define the term ‘ethics’.

(b) Discuss FIVE examples of ethical or unethical behaviour that could be addressed in an ethical
code for procurement professionals.
(a) Ethics are moral principles or values about what constitutes 'right' and 'wrong' behaviour. At a
corporate level, there are issues which face an organisation as it formulates strategies and policies
about how it interacts with its stakeholders, including Corporate Social Responsibility. examples,
such as not dealing with suppliers who exploit their labour force or suppliers who offer bribes to win
business.
• Not accepting inducements or gifts from suppliers or potential suppliers, other than those
of a nominal value and which have been sanctioned
• Not allowing offers of hospitality to influence, or to be perceived to influence, procurement
decisions
• Not allowing vested interests, such as having a family link or a personal interest in a
supplier, to influence procurement decisions
• Never breaching the confidentiality of information received in a professional capacity
• Ensuring that information given to suppliers is accurate and that all potential suppliers have
access to the same information
• Striving for genuine, fair and transparent competition
• Promoting positive environmental issues, such as reducing waste and increasing recycling
• Never using one's authority or position for personal gain
(a) Describe the roles typically undertaken within an organisation by: (i) The local procurement
teams (ii) The central procurement team.
(b) Describe THREE possible hybrid structures for a procurement or supply chain function
(a)
(i) The roles of a local procurement team might have included sourcing small order items, sourcing
emergency items to avoid disruption to production, sourcing from local suppliers and sourcing items
used only by the local division.
(ii) The roles of a central procurement team might have been described in terms of determining
procurement and supply chain policies, preparing standard specifications, negotiating bulk contracts,
procurement research and procuring capital assets.
• CLAN (Centre Led Action Network), which is a relatively decentralised model.

• SCAN (Strategically Controlled Action Network), which is a relatively centralised model.
• A Lead Buyer approach, which is a way by which responsibilities can be devolved in a CLAN.
• A Business Partnering approach, which is one where a member of a procurement team
works with a user department, representing the procurement function.
• A consortium structure, where a group of separate organisations combine together to
procure goods and services for mutual benefit.
• A shared services approach, which encompasses those support functions that are used by
many different departments within an organisation, for example IT and HR.
• An outsourcing approach, whereby an organisation contracts with a third party organisation
to carry out its procurement function.
(a) Explain the term 'Enterprise Resource Planning'.

(b) Describe FOUR of the main functions of an IT based inventory management system
(a) Enterprise Resource Planning as an IT based system which consolidates materials, manufacturing,
logistics, supply chain, sales and marketing, finance and HR into a single integrated management
system. ERP system offers real time information to solve a range of business problems. Examples,
such as SAP and Oracle.
• Manage demand and to ensure that supplies are available in the right quantities at the right
time for the needs on internal and external customers
• Forecast demand and therefore supply requirements in order to avoid overstocking
• To capture goods inwards information accurately and to integrate this information with
stock balance, contract management and payment systems
• To record stock movements (receipts, issues, transfers) and locations
• Translate issue requisitions into stock 'picking and packing' tasks
• Controlling stock levels, in terms of quantity and value and to monitor and maintain
minimum and maximum stock levels
• To trigger automatic replenishment requisitions or order at pre-established order points
• To monitor productivity and utilisation, to derive usage rates for feeding into demand
management calculations
• Maintain stock integrity, by recording and identifying damage, deterioration and loss
• Produce management reports using the range of data available
• Ensuring that supplies are replenished in accordance with procurement policies; this
includes triggering automatic replenishment requisitions at pre-established order points
(a) Describe FOUR alternative structures for the procurement function in an organisation
(b) Outline THREE areas in which organisational policies could affect the procurement function
• Centralised, whereby all the procurement requirements for the organisation are dealt with
at one central point. For example, if an organisation has seven factories across a country, the
procurement unit will be in one location and it will procure for all seven factories
• Decentralised, where each operating unit carries out its own procurement, independently
of the other units. In the example above, each of the seven factories will have its own
procurement team
• CLAN (Centre Led Action Network): this is a relatively decentralised structure, where
procurement staff are located in different business units with secondary responsibility to a
small procurement centre
• SCAN (Strategically Controlled Action Network), which is relatively centralised. It is similar to
CLAN, except that local procurement staff report to the central procurement team
• Lead Buyer, where defined procurement responsibilities are delegated to designated
members of user departments and to lead buyers for particular categories of procurement
• Business Partnering, which is where a member of the procurement team works with a user
department and they identify situations where procurement and supply chain expertise can
add value
• A consortium, whereby a group of separate organisations combine together to procure
goods and services for mutual benefit. Their requirements are aggregated to benefit from
economies of scale
• Outsourcing: an organisation contracts with a third party provider to undertake the
procurement function
(b) Answers to part (b) outlined the following organisational policies that affect procurement:
• Levels of delegated authority for procurement decisions. This determines the maximum
levels of expenditure for procurement staff
• The use of defined procurement procedures, decisions, rules or guidelines to support good
practice. For example in areas such as the administration of tenders and the use of call-off
contracts
• Sourcing decisions, such as single or multiple sourcing, the use of global sourcing and the use
of competitive tendering
• Ethical and sustainable procurement, with examples being the use of fair trade suppliers,
the use of local suppliers or 'green' specifications and sourcing
(a) Explain FIVE ways in which IT based inventory management systems can be used by the
procurement and supply chain function.
(b) Define the term ‘Conflict of Interest’ and explain why governance in this area is particularly
important for procurement.
Answers to part (a) should have explained five ways in which IT based inventory management
systems can be used by the procurement and supply chain function. These might have included:
• To capture goods inwards information accurately and to integrate this information with
stock balance, contract management and payment systems
• To record stock movements (receipts, issues, transfers) and locations
• Translate issue requisitions into stock 'picking and packing' tasks
• Maintain stock balances for verification during physical stock takes and for stock valuations
• To trigger automatic replenishment requisitions or order at pre-established order points
• To monitor productivity and utilisation, to derive usage rates for feeding into demand
management calculations
• Maintain stock integrity, by recording and identifying damage, deterioration and loss
• Produce management reports using the range of data available
Answers to part (b)
'Conflict of Interest' it is a key principle of business ethics is not offering gifts or inducements
which may influence the recipient's decision making. A related principle is that individuals should
not make decisions, or divulge confidential information, for personal gain. To avoid such
situations, governance is particularly important for procurement. Most organisations have clear
rules on receiving of gifts and hospitality, where there is a perceived ethical issue. There are also
ethical codes, formulated by organisations such as the Chartered Institute of Procurement and
Supply. As a general principle, any conflict of interest should be disclosed, so that proceedings
are transparent and open to control.
Reference to other situations, such as a buyer favouring a particular supplier because they had a
personal interest in it as a shareholder or being related to the owner
(a) A procurement consortium is a group of separate organisations that combine together for the
purpose of procuring goods and services. Describe THREE disadvantages, for an organisation, of
operating within a procurement consortium.
(b) Describe TWO advantages for an organisation in having an outsourced procurement function.
• There are costs and time associated with communication and coordination, staff
development and policy development. These might outweigh any savings arising from the
consortium being able to buy in bulk and achieve economies of scale
• There is a transparency issue between consortium members. Buyers need full information
about plans, processes, designs and costs in order to make informed procurement decisions.
This may expose some members of a consortium to commercial or intellectual property risk
• A consortium may suffer from lengthy negotiation and decision making processes and this
may deter some suppliers from dealing with the consortium
• Aggregated demand from consortium members may result in large contracts which may
deter small or medium sized enterprises from doing business with the consortium
• A large consortium may fall foul of the laws and regulations designed to prevent dominant
market players from abusing their market position, for example by dictating prices
• Within a consortium, relationships with suppliers may become more transactional and it
would be difficult for a supplier to develop long term relationships with a group of different
organisations
• The freeing up of resources, such as management time, office space and equipment, which
may be deployed for value-adding activities elsewhere
• The ability to draw on the procurement knowledge, experience, expertise, contacts,
systems and technology of the outsourcing function, which may not be available in-house
• The potential for aggregated demand from a number of clients, resulting in cost savings
through economies of scale and bulk discounts
• The re-focusing of the remaining procurement staff on strategic issues, such as make or buy
decisions and sustainable procurement policies
• Greater flexibility to adjust to the peaks and troughs of demand for procurement activity.
The contracting organisation no longer has to cope with excess payroll in slack periods, or
overtime in peak periods
Explain FIVE key areas of guidance for procurement professionals within the CIPS Code of Conduct
• Members must disclose any personal interest which might impinge on their work activities,
or which might appear to do so
• Members must respect the confidentiality of information that comes into their possession
and it must not be used for personal gain
• Members must avoid any arrangements which might prevent fair competition
• Business gifts from suppliers or potential suppliers must not be accepted, except for those of
low value
• Any hospitality offered by suppliers or potential suppliers must be modest
• Members must maintain the highest standards of integrity in all business relationships
• Members must ensure that they fully comply with any applicable laws or regulations
Identify FIVE potential barriers to achieving good procurement governance.

Good answers would have identified and given some information about the following:
• The lack of support from senior managers within the organisation

• A lack of co-operation from stakeholders in the procurement function, both in the internal
supply chain and the external supply chain
• Poor ICT systems and systems integration
• A lack of clarity in the organisation's governance model, codes of conduct, rules and
procedures
• A lack of resources, including finance and time, to incorporate any governance
requirements
• A lack of coherence and co-ordination of procurement responsibilities
4.
Compare and contrast a private sector company with a public sector organisation in the following
FIVE areas:
(i) Ownership and control (5 marks)
(ii) Sources of finance (5 marks)
(iii) Legal and regulatory environments (5 marks)
(iv) Organisational objectives (5 marks)
(v) Importance of corporate social responsibility.
(i) Ownership and control: by individuals in the private sector – owners who have provided the
finance and manage the business or, in a plc, appointed directors. Shareholders may vote to remove
or elect directors. Public sector organisations undertake a public service. They are publicly owned
to serve the public through a political purpose and the general benefit of society.
(ii) Sources of finance: in the private sector usually from owners or, in a plc, from shareholders
investing money in expectation of financial reward. Other sources might include: bank loans or
overdraft facilities secured against assets or investment from venture capitalists in exchange for a
share of the business and expected returns. Additionally, revenue from selling goods or services
would be a source of finance. Public sector organisations are funded by the taxpayer and include:
company taxation, personal taxation, specific duty or duties on (e.g.) imported goods, fines resulting
from criminal activity, fees and ancillary charges.
(iii) Legal and regulatory environments: In the private sector, plcs are regulated to offer protection to
consumers, to offer protection within a market, to maintain competitive markets and prevent the
development of monopolies, and to maintain national interests and public welfare. Regulation is by
statutes and rules imposed by regulatory bodies such as the Office of Fair Trading. The regulatory
environment of the public sector is similar in many ways but there is a difference because regulators
are not regulating openly competitive commercial markets. Public sector regulation exists to protect
national interests and standards. Organisations in the UK public sector have to follow EU
procurement directives.
(iv) Organisational objectives: typically profit in the private sector. However, there are also potential
objectives such as the organisation’s survival in highly competitive markets and growth of sales
and/or market share. Others might relate to enhancing the organisation’s reputation, making its
brand more well-known, new product development and increasing the return to shareholders. The
public sector provides public services established by the government. The objective here is to
provide a service fulfilling economic and social goals.
(v) Importance of corporate social responsibility: difference between the sectors is increasingly less
as CSR is becoming, an essential element of corporate governance. Profit motive and need to satisfy
shareholders’ financial expectations might suggest that the private sector is slower to engage with
CSR pointing to the treatment of suppliers and the use of buyer power to influence suppliers’
behaviour. The public sector is usually better placed to influence /adopt CSR. Additionally there is
the impact of EU Procurement Directives on CSR issues such as sustainability and the environment.
(a) Compare a private sector organisation with a public sector organisation in the following THREE
areas:
(i) Legal and regulatory environments (ii) Organisational obectives (iii) Importance of corporate
social responsibility.
(b)Describe FIVE ways in which the charitable status of a third sector organisation impacts on its
procurement function.
(a)
(i) Legal and regulatory environment - private sector organisations are regulated to offer protection
to consumers, within a market, to maintain competitive markets and to maintain national interests
and public welfare. In the public sector this is similar but it exists to protect national interests and
institutionalised standards. A key legal distinction is that the public sector has to follow strict
tendering rules, such as EU procurement directives.
(ii) Organisational objectives – profit maximisation is the most commonly quoted objective of the
private sector but higher marks were gained by explaining other objectives such as survival, growth,
brand development, market share and return to shareholders. The public sector is becoming more
commercialised but the over riding objective is to provide a public service and fulfil economic and
social goals rather than make profit.
(iii) Corporate social responsibility – here the difference between the two sectors is becoming less. It
is becoming an essential part of corporate governance in both sectors. In the private sector this still
does conflict with the profit motive and relationships with suppliers to maintain competition. The
public sector is in a good position to drive CSR within governance and EU requirements and CRS is a
good fit with organisational objectives.
(b) might include a clear understanding of limited budgets and donations, accountability to trustees,
regulators and members. Also answers might cover accountability, probity, ethical standards,
ensuring the continuation of the charities objectives, transparency and regulatory compliance.
(a) Explain the differences between a private sector company and a public sector organisation in
the following areas: (i) Ownership and control (ii) Sources of finance
(b) Describe FIVE issues that may affect procurement in the agricultural sector.
(a)
(i)A private sector company is owned by shareholders in the case of a limited company, or
individuals in the case of a sole trader or partnership. Shareholders appoint directors to control the
company, who in turn will appoint managers. Public sector organisations, on the other hand, are
owned by the public, with the government representing the public. They are controlled by the
elected government and selected management. The main focus of private sector companies is to
maximise profits, whereas the focus of public sector organisations is to provide public services, such
as health care and education.
(ii)Private sector organisations are primarily financed by investments from shareholders, or other
types of owner, or from re-invested profits. Other sources might be bank loans, overdrafts or
debentures. Public sector organisations, however, are financed by taxpayers and examples might be
personal taxation, such as income tax or value added tax and company taxation, such as corporation
tax. Other sources include council taxes, levied by local authorities, fines and car parking fees.
• There is a high degree of risk and uncertainty through the supply chain, resulting from
unpredictable weather and climate factors. The impact on procurement is the need for
careful planning to mitigate such risk and uncertainty
• This is likely to lead to significant fluctuations in the price of agricultural products. Where
shortages arise, prices are likely to rise, while in the case of bumper harvests, prices are
likely to fall. Procurement should have strategies in place to deal with such fluctuations
• The potential long geographical distances from the point of production to the point of
consumption of agricultural products, creating transport and supply chain management
risks. Again, procurement will need to ensure that such risks are mitigated, by ensuring that
appropriate methods of transport are used
• The high capital investment that is likely to be needed, for machinery and start-up stock.
Procurement will need to be involved in the sourcing of such items and ensure that value for
money is achieved
• Laws and regulation to protect food hygiene and health and safety is likely to be a key issue
facing the agricultural sector and procurement will have to ensure that such laws and
regulations are adhered to
• Environmental and sustainability issues, such as soil exhaustion, water depletion and
contamination and the loss of bio-diversity are issues that must be addressed by
procurement in the agricultural sector
• Supply chains in the agricultural sector often cross political boundaries, leading to issues
such as foreign exchange rate risk, differences in national laws and languages, all of which
must be addressed by procurement
Discuss FIVE ways in which the objective of profitability in a private sector organisation might
impact on its procurement activities.
Good answers would have started by examining the concept of profit, stating that it is the difference
between the organisation's revenue from sales and the cost of providing the goods or services. This
can affect procurement activities in many ways, which might include:
• A pressure to focus on reducing expenditure, by becoming more adversarial, or buying

cheaper inputs. This might be achieved through negotiating with suppliers more intensively,
buying in bulk, outsourcing, or sourcing globally from lower cost economie This might,
however, increase costs in the future if cheaper products lead to poor quality, which may
result in scrap or reworking
• Changing specifications through value Analysis and Value Engineering might also result in
lower costs without affecting quality, by challenging the nature of inputs and the
procurement function can contribute to this process, involving suppliers to add value
• Waste reduction and value-adding, which has resulted in the procurement function moving
from being a reactive activity to a proactive one by developing new skills to eliminate costs
• Adopting a Supply Chain Management concept, this moves procurement from an
adversarial approach to one of working in a more collaborative manner with suppliers. This
might lead to lower costs and higher quality, which is likely to result in increased sales
revenue
• The procurement function can also add value by a careful approach to supplier evaluation
and selection
• Introducing activities such as early buyer involvement and early supplier involvement can
also assist in lowering costs at the early stage of design
• Adopting Corporate Social Responsibility policies, which might cost more in the short term,
but in the longer term it is likely to improve the organisation's brand image and result in
higher sales revenu
Explain FIVE factors that impact on purchasing activities in the retail sector.
• Bottom line thinking: Retailers do not add much value to the goods they sell and their
margins are small. As a result, buyers must focus on goods that will sell well at the best
possible profit margins
• Broad assortment: One of the functions of retailers is to make available to customers a wide
range of goods offered by many different manufacturers. The number of stock lines and
suppliers is high and buyers have to attempt to monitor prices, quality and supplier terms
and conditions
• Buying against supplier specifications: Retailers generally buy what is available on the
market, as described by suppliers, who determine the specifications. As a result, changing
suppliers is easy for retailers and supplier relations are less durable
• Short feedback loop: In the retail sector, buying products and selling them are close
together in time. As a result it quickly becomes apparent which products are selling and
which are not. A fast response to such information is a key requirement for procurement
• Product mix: A retailer develops a product mix to maximise sales. This mix will change in line
with seasons, tastes and fashion. Therefore retailers have to monitor contemporary themes
among its customer base and ensure that customer feedback is accurate and regular
• Control of stock: The retailer will want to maintain sufficient stock to avoid stock-outs, or it
may lose customers to competitors. On the other hand there is a need to avoid the cost of
holding too much stock. The solutions are accurate demand forecasting,, responsive
replenishment systems and agile supply chains, capable of delivering on short lead times
(a) Explain the impact of THREE objectives of a public sector organisation on its procurement
activities
(b) Explain how a purchaser in the public sector complies with the regulatory requirement for: (i)
Competitive supply (ii) Accountability.
• To deliver essential public services, such as education, healthcare and housing, which the
private sector might not provide. A typical impact of this would be that procurement must
ensure an adequate level of service in providing the goods and services needed in the
education, healthcare and housing sectors. This might be achieved by comprehensive
specifications, including KPI's and supplier performance monitoring
• To encourage national and community development; examples might include developing
education and skills, stimulating economic development and developing infrastructure, such
as road networks and communications. The impact of this on procurement activities would
be careful supplier selection and awarding contracts only to those suppliers with the
capability to contribute to the appropriate types of development
• To pursue socio-economic goals, such as support for small and minority-owned businesses,
the pursuit of sustainable development and environmental protection. Again, this would
impact on the type of supplier chosen; these must be suppliers who can contribute to the
above requirements and who's values are the same as the public sector organisation
• Ensuring value for money and the efficient use of public funds, which mainly come from
taxpayers. The impact of this would be rigorous supplier selection and awarding contracts
only to suppliers who can provide the required level of service at the lowest possible prices
(b)
(i) Regulatory requirement for competitive supply - This might have been in terms of the public
sector purchaser ensuring that competitive source selection procedures, such as competitive
tendering, are used. For smaller spends, quotations should be obtained from a number of potential
supplier (typically a minimum of three). For higher value spends, competitive tendering should be
used. For example, open tendering ensures a large number of potential suppliers taking part,
enhancing competitiveness. Selective tendering involves fewer suppliers, using only those with the
capability, but it still allows a number of suppliers to be involved.
(ii) Regulatory requirements for accountability – this should have referred to the rules laid down by
government bodies. In the United Kingdom, these are the National Audit Office, the Audit
Commission and the Public Accounts Committee. These bodies monitor the achievement of value for
money and public sector organisations must have detailed procedures and audit trails that can be
monitored. The process must be visible. This is important because public funds come mainly from
taxpayers, to whom purchasers are ultimately accountable
Describe FIVE possible 'drivers' or influencing factors of procurement activities in third sector
organisations.
Answers should have described five 'drivers' of procurement activities in third sector organisations.
• The values of stakeholders, which are often directly related to the mission and purpose of
the organisation
• Regulatory bodies, such as the Charities Commission and their role and influence in
procurement activities
• The need to align procurement policies and procedures with the core values of the
organisation, for example to support 'green' procurement if the organisation is an
environmental charity
• The management of reputation and reputational risk. A public relations crisis, caused by an
internal failure of implementation is both more likely for third sector organisations and more
significant in its impact
• The need to source inputs for a very wide range of activities, some of which pose logistical
challenges, such as foreign aid and disaster relief
• The need to act as retail buyers if goods are to be resold to raise funds and this will mean
that goods will have to be bought at a price, from which a profit can be made
• Ethical issues in dealing fairly with suppliers and providing suppliers with a fair price for
their goods and services
• Limited resources, which come mainly from donations and government grants, which
means that procurement always has to strive for 'best value'
• The need for economic sustainability and to achieve profits, which can be used to support
the third sector organisation's work
(a)Describe THREE objectives of public sector organisations

(b)Explain FOUR ways in which regulation might impact on public sector procurement
• To deliver essential services, not provided by the private sector, to an acceptable level or
quality.
• To encourage national and community development, by developing education and skilling
and stimulating economic activity.
• To pursue socio-economic goals, such as support for small and minority-owned businesses
and the pursuit of sustainable development.
• To ensure that bought in materials, goods and services comply with defined public standards
and specifications.
• To ensure that all procurement exercises are compliant with public policies and statutory
procedures.
• To ensure that all supply chain operations are compliant with legal requirements, for
example health and safety and environmental sustainability.
• There is a high requirement for accountability, so that audit trails must be maintained.
Procurement in the public sector must be based on value for money, because taxpayers'
money is being used.
• The tendering process is more likely to be more bureaucratic and time consuming, because
of regulations such as EU Procurement Directives.
Compare FIVE characteristics of manufacturing sector organisations with those of retail sector
organisations
• Manufacturers buy materials and components for transformation into finished products. In
the case of retailers, no transformation is involved as they buy finished goods for resale
• In manufacturing. demand is forecasted, production is planned and there is long term
investment in plant and equipment. Buying in the retail sector is speculative and buyers
procure what will sell. Also in retailing there is no investment in manufacturing plant
• Manufacturers usually have a limited or stable product range, with long life cycles. Retailers,
on the other hand sell a wide variety of items, with very short life cycles
• In manufacturing, there are long lead times and manufacturing cycle times, whereas in
retailing, these are much shorter
• Manufacturers are more likely to have close and collaborative relationships with suppliers,
whereas retailers, where the bottom line is a key concern, are more likely to have
adversarial relationships with their suppliers
• Manufacturers are likely to hold more stock to ensure that the production process is not
disrupted. Retailers are likely to hold less stock, with an emphasis on consumer and seasonal
demand
(a) Outline the impact of TWO private sector objectives on procurement and supply chain
activities
(b) Outline the impact of THREE objectives in the 'not for profit' sector on procurement and supply
chain activities.
• To maximise profitability. This puts the pressure on procurement to minimize costs, which
might generate a competitive approach with suppliers. Methods of reducing cost might
include outsourcing, international sourcing and value adding negotiations with suppliers
• Increasing market share, which might also involve cost reductions, or working with suppliers
who are innovative. It might also involve forming long-term strategic relationships with
suppliers to ensure that customers get the best possible products or services
• Corporate Social Responsibility, which will mean that procurement should only enter into
contracts with suppliers who are ethical and environmentally friendly. It might also mean
that contracts with suppliers have clauses covering CSR to ensure supplier compliance
• To maximise profitability. This puts the pressure on procurement to minimize costs, which
might generate a competitive approach with suppliers. Methods of reducing cost might
include outsourcing, international sourcing and value adding negotiations with suppliers
• Increasing market share, which might also involve cost reductions, or working with suppliers
who are innovative. It might also involve forming long-term strategic relationships with
suppliers to ensure that customers get the best possible products or services
• Corporate Social Responsibility, which will mean that procurement should only enter into
contracts with suppliers who are ethical and environmentally friendly. It might also mean
that contracts with suppliers have clauses covering CSR to ensure supplier compliance
(a) Describe, with examples, FOUR ways in which a third sector organisation's objectives may
impact on its procurement activities.
(b) Explain the impact of regulation on a third sector's procurement function.
(a) These might have included the following:
• Raising public awareness of the organisation's cause; this might be for an environmental or
social pressure or interest group. The impact on procurement is that all procurement
activities must be done in a way that conforms to the organisation's objectives. For example,
in the case of an organisation concerned with environmental issues, procurement activities
must be arranged in an environmentally friendly manner
• Political lobbying and advocacy on behalf of the organisation's cause. The impact on
procurement is that purchases that might be seen to go against the cause should be avoide
• Raising funds to carry out the organisation's activities, perhaps using commercial operations
to generate profits. This is likely to impact on procurement in that any purchases to be made
for resale must be attractive to customers, in terms of quality and price
• Providing material aid and services to beneficiaries, such as the homeless or the aged. The
impact on procurement would be to source items that would contribute as much as possible
to the organisation's cause
• Providing services to members, for example trade unions advocating employment rights and
professional bodies securing ethical and technical standards. The impact on procurement
would be to source only from suppliers who have similar objectives
• Mobilising and involving members of the public in community projects for mutual benefit.
The impact on procurement will be that purchases will need to be made that will add to the
organisation's objectives in some way
(b) In the third sector, procurement functions are more closely regulated than in the private sector.
This is because they are spending money which is derived from donations and government grants.
This means that procurement is performing a 'stewardship' role, with a strong emphasis on
accountability. Also, third sector organisations, such as charities, will need to ensure that
procurement complies with the charity's legal requirements and those of the Charities Commission.
Regulators may check that a third sector organisation is run for the public benefit and not for private
advantage. This means that information must be made available to the public and that activities are
audited. Regulators may also investigate complaints about possible mismanagement or abuse. This
will apply to the third sector organisation in general and to the procurement function specifically.
(a) Outline FIVE roles of a public sector regulator.

(b) Explain, with examples, how objectives for corporate social responsibility may impact on public
sector procurement.
• The budgets of public sector bodies are set within frameworks laid down by government
and regulators are responsible for ensuring compliance
• Regulators also scrutinise expenditure to ensure that it is within government guidelines
• Regulators also protect national interests and public welfare, to ensure that all operations
and procurement are carried out in ways that will avoid negative effects on national
interests
• Regulators also issue and renew licences where organisations need such licences to carry
out their operations and services
• Regulators set and advise on standards of good practice, quality standards and service levels
• Regulators handle complaints against public sector organisations, for example ombudsmen
• Regulators monitor and audit organisational activities for compliance to standards
• Regulators ensure that taxpayers' money is spent appropriately.
(b) This should cover the main areas of corporate social responsibility. These might have included
the environment, gifts and ethics, sustainability, using small and local suppliers and the safe disposal
of toxic materials. There would also have been an explanation of how the objective of corporate
social responsibility might impact on public sector procurement.
Example: To meet environmental objectives, for example to reduce waste, public sector
organisations need to work with the supply base, in order to manage conflicting objectives of
reducing cost against the additional cost of monitoring. Because public sector procurement has a
stewardship role over the public money it spends, it is critical that records and audit trails are
maintained to prove accountability. Also, introducing CSR policies may require public sector
procurement to support ethical and responsible behaviour by supporting local businesses

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L4M1 (D1)

(b) These might have included:

(a) Define the term ‘stakeholder’ in relation to an organisation

(b) These might have included:

• Pre-acquisition costs, such as research and tendering

(b) These might have included:

Explain FIVE differences between operational expenditure and capital expenditure

• Segment A (low power/low interest); examples of such stakeholders might be small

(b) These might include:

(a) Explain TWO ways in which 'procurement' differs from 'purchasing'.

These might have included:

B) These might have included the following

• Reduced costs by eliminating waste and implementing cost reduction programmes

(a) These might have included:

• E-requisitioning to suppliers for goods and services required.

(b) Activities which might have been explained include:

• Expediting, which involves following up or chasing an order, perhaps by using an online

(a) These should have included:

(b) These might have included:

• Cost savings as processes are streamlined and speeded up

(a) Outline FIVE stages of the sourcing process.

• Identifying a need, which may be through a requisition or a Bill of Materials

(b) These might have included:

• existing procurement database records of preferred, approved or authorised suppliers,

(b) These might have included:

Describe FIVE sequential stages of a typical tendering process.

• An evaluation of the suitability of tendering as a procurement methodology, as compared to

• Tracking and tracing deliveries

(b) These include:

(a) These might have included:

(b) These might have included:

(a) Explain the role of a shared services unit (SSU).

• cost effective internal service;

• liaison with its customers;

• anticipating future demand;

The benefits of retaining the present de-centralised structure include:

(a) These might have included:

(a) Explain THREE advantages to an organisation when adopting a devolved procurement

(a) Define the term 'Corporate Governance'.

(b) These might have included:

(a) Define the term ‘ethics’.

(b) These might have included:

(b) These might have included:

• CLAN (Centre Led Action Network), which is a relatively decentralised model.

(a) Explain the term 'Enterprise Resource Planning'.

(b) These might have included:

Answers to part (b)

(b) These might have included:

Identify FIVE potential barriers to achieving good procurement governance.

• The lack of support from senior managers within the organisation

(b) These might have included:

• A pressure to focus on reducing expenditure, by becoming more adversarial, or buying

(a) These might have included:

(a)Describe THREE objectives of public sector organisations

(b) These might have included:

These might have included:

(b) These might have included:

(a) Outline FIVE roles of a public sector regulator.

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