L4M6 - Chapter 1.1 - 1.4

CIPS_STUDY
AFRICA
Supplier Relationships
L4M6
Chapter 1.1
CIPS_STUDY AFRICA – L4M6
1.1 The different types of commercial relationships in supply chains
Supplier Relationship Management (SRM) is one of the key skills used to manage an
organisation's spend with key suppliers.
The successful use of SRM results in added value, improved supply chain performance and
risk mitigation.
SRM is widely used in industries where a large portion of finished goods and services are
provided by external suppliers.
It is not necessary or beneficial to form a close relationship with all suppliers.
You make use of SRM to identify the most beneficial type of relationship and have strategies in
place to achieve this.
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1. Define internal suppliers?
They are ‘in-house’ suppliers and linked to the make-or-buy decision, for which procurement
plays a key role.
The make-or-buy decision must be linked to the strategy and plans of the organisation.
The products or services provided by an internal supplier are considered core and not suitable
to be produced externally.
2. What are the benefits of an ‘in-house’ supplier?

• A greater degree of control over the process
• Ideal for a product that is time-critical or subject to frequent design changes
These core products/services provide the organisation with a competitive advantage.
3. What is the process for a make-or-buy decision?

The procurement department and key stakeholders need to compare the costs of producing ‘in-
house’ to the cost of buying.
Non-price factors such as quality need to be considered.

The procurement department also needs to consider the risk involved with using an external
supplier.
The decision involves achieving the best balance between cost and flexibility.
4. List the advantages of using an internal supplier?

• Greater control and continuity of supply
• Their relationship is already stable and long-lasting since they share the same culture and
values.
• Improved quality control over the manufacturing process
• Potential lower costs – no supplier mark-ups
• The IP is protected
5. List the disadvantages of using an internal supplier?

• No guarantee that the price is value for money unless it is benchmarked
• An internal product cost will have fixed costs & variable costs, while an externally sourced
product/service that is bought only when required will have variable costs
• With no money being exchanged, the internal supplier may be less motivated to meet
required performance standards
• Requires continual investment with the internal supplier to keep up with technology
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6. What factors affect ‘in-house’ production?
• The high cost of production if the volume is low
• Licences or permits that may be required
• Shortage of skills
7. How do you manage an internal supplier?

The same processes/procedures should apply to the evaluation, review and management of
both internal and external suppliers.
You need to maintain a positive working relationship with the internal supplier.
The poor performance of an external supplier could lead to the insourcing of a product/service.
Insourcing is very costly for an organisation.
8. What are the main reasons for the existence of the procurement department
concerning external suppliers?
• Selecting
• Having a contract
• Management of the external supplier
9. What factors need to be considered when using an external supplier?

• Purchase price
• Lead times
• Quality of product/service
• Risks to the supply chain – delivery delays, natural disasters, human rights issues & political
instability
10. What is the underlying need that procurement needs to do when

developing supplier relationships?
Procurement needs to protect the reputation of the organisation and may need to undertake
spot audits of suppliers to ensure compliance.
11. List the advantages of using an external supplier?

• External suppliers are often experts and bring innovation to the market
• They are more cost-effective and you can benefit from economies of scale
• You can free up internal resources for core activities
• External suppliers may be more flexible in meeting changes in demand
• Useful for small volumes
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12. What are the disadvantages of using an external supplier?
• Creates dependency on the supplier, which introduces risks
• Can damage the buyer's reputation if the supplier is involved in unethical behaviour
• Cost and risk of transportation
• Risk of relationship issues – buyer and seller may have different views of the importance of
the relationship
13. What is the relationship spectrum?

It is used to classify relationships.
The spectrum allows procurement to determine where effort needs to be focussed to develop
relationships that will be beneficial and drive value.
14. List the different types of relationships as per the spectrum?

Competitive
o Adversarial
o Arm's length
o Transactional
o Closer tactical
o Single sourced
o Outsourced
o Strategic alliance
o Partnership
o Co-destiny
Collaborative Strategic
In reality, an organisation will have many types of relationships, as it is not possible or desirable
to create strategic relationships with every supplier.
15. What tool is used to segment suppliers & how does it work?
The PARETO PRINCIPLE.
This tool will show you that 20% of your suppliers are strategic – they have contracts with the
most value and highest level of risk.
Therefore more time is needed to be spent with these suppliers.
16. What are the ways that conflict can be worked out?
- Win-Lose
- Lose-Lose
- Win-Win
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17. Describe the different types of relationships as per the spectrum?
Adversarial - The buyer wants to gain at the expense of the supplier's profit margin. Typical
for non-core goods/services or one-off items.
Poor communication, lack of trust, short term or one-off contracts.
Arm’s length – These suppliers are used infrequently for short term contracts. They work
independently of each other.
Transactional – Similar to Arm’s length relationships. The frequency and volume are higher,
and the products/services are still low value and low risk.
This type of relationship exists in competitive markets where the buyer undertakes regular
competitive processes to secure the best price.
Closer tactical – The buyer does not want a collaborative relationship, however, the supplier
needs to be competent.
This type of relationship exists in tiered supply chains where this type of supplier may coordinate
the activities of other suppliers.
Single source – This is when the buyer purchases a product/service exclusively from one
supplier to obtain volume discounts and greater levels of quality.
Single source decisions are made at the top management level. It requires high levels of trust
and creates risks to the buying organisation, due to the level of dependence on the supplier.
Outsourced – This is when the production was done ‘in-house’, and is now done by an
external supplier. Outsourcing aims to reduce costs.
In most cases, work is outsourced to a supplier operating in low-cost economies (low labour
costs)
Normally the buyer will outsource non-core activities so that they can focus on core activities.
You need to consider the TUPE legislation in the UK.
Strategic alliance – is when two companies join together to deliver a new product. Each
company will maintain its own identity and autonomy.
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Partnerships – Are created when procuring high risk, high-value goods, or if there are few
viable suppliers.
Partnerships allow the supplier to have a greater understanding of the buyer's needs.
It allows for more innovative developments, improvements in quality and reductions in waste.
Partnerships result in more long term relationships and commitment from top management,
which makes the relationship more important than individual gain.
Co-destiny – The buyer and seller are closely linked which results in them making decisions
jointly about their future, and choosing a common destiny.
This results in a high level of inter-dependence.
A JV is an example of a co-destiny relationship.
18. Explain the elements of the relationship life cycle?

Qualification
Starts with the identification of a suitable supplier and on-boarding.
RFI (Request for Information) – This will be used if the buying organisation is unsure about the
number of suitable suppliers in the marketplace or the buyer is unaware of their capabilities.
This process is used to shortlist/pre-qualify suppliers for the next stage.
RFP (Request for Proposal) – This is done if the supplier is aware of the number of suppliers
and their capabilities. Used when there is competition in the marketplace.
Carters 10’C’s can be used to support the building of an effective selection and qualification
process.
1. Competency
2. Capacity
3. Commitment
4. Control
5. Cash
6. Cost
7. Consistency
8. Culture
9. Clean
10. Communication
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Segmentation and Risk Management
Products/services will be segmented and classified to ensure that the correct relationship type is
developed with each supplier.
Risk management will also be carried out for strategic contracts.
Performance Management
Usually undertaken with each supplier. Forms part of the management process and will involve
the use of KPIs.
The frequency will depend on how strategic the contract is.

This process will involve internal stakeholders, who will have key information about the supplier.
This tool can be used for supplier development.
KPI’s –
Safety
Quality
Delivery
Cost
Morale
Environment
Development and Innovation

Undertaken with strategic or potentially strategic suppliers, since it is a time-consuming process.
It is based on the vision and objectives of the organisation and both parties need to have a
mutual desire to achieve the objectives of the supplier development programme.
It will result in measurable benefits and involve change management.
19. What are the reasons for supplier development?

• Previous performance issues that need to be addressed
• The buying organisation needs to improve its performance to become competitive
• The buyer wants to develop new products and services
• The buyer wants the supplier to adopt some of its processes and technology
20. What are the benefits of supplier development?

• Reduction in cost for the buyer and seller
• Elimination of waste in the supply chain results in the reduction of costs
• Long term security of business, which could lead to innovative ideas
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21. What are the reasons for ending a relationship?
• The contract comes to a natural end. There is no need to purchase the product/service
• Another supplier can provide a more competitive offer
• The contract is terminated due to a material breach such as poor performance
• The supplier becomes insolvent. Can also be classified as a material breach, and will result
in the termination of the contract
22. What are the steps for introducing a new supplier?

• If the contract comes to a natural end, the phase-out will be planned
• If the supplier becomes insolvent, the buyer needs to find a suitable replacement quickly
• If an existing supplier loses a tender process the phase-out could be hostile
The buyer should include hand-over processes in the contract and should also cover
management of the TUPE process
23. What are the phases of a relationship cycle?

1. Onboarding
2. Qualification
3. Segmentation and risk management
4. Performance management
5. Development and Innovation
6. Phase-out
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L4M6
Chapter 1.2
1.2 Analysis techniques to assess relationships in supply chains
Several analysis techniques can be used for sourcing and supplier development.
Kraljic model (Supplier positioning)

Supplier preferencing model
Market management matrix
All these techniques have advantages and disadvantages, which should be considered when
used.
Action plans can then be developed to ensure buyer-supplier relationships are developed to
achieve the desired strategies.
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1. What are the benefits of undertaking a positioning exercise?
• Allows for the buyer to leverage available resources by identifying sourcing relationships and
opportunities
• Identify opportunities to develop competitive advantages
• Provides a framework for decision making and action planning for the buyer
• Risk management – to identify which products/suppliers pose a risk to the organisation
2. List procurement objectives that can be supported by the use of portfolio

analysis?
• Identify opportunities for moving non-contract spending to contract spending. Make use of
Pareto analysis on the top non-contract suppliers
• Identify an organisation's key products/suppliers. You can make use of the Kraljic model to
identify which items are strategic
• Develop value-adding relationships with strategic suppliers
Review where these suppliers are on the supplier preferencing model to assess if more
collaborative relationships are possible.
3. Explain the Pareto analysis?

Also known as the 80/20 rule or ABC analysis. It can be used to look at the costs of a
product/service.
This analysis shows where costs sit.
Spending data is crucial to making the correct procurement decisions. Allows the buyer to plot
products/services on the financial axis of the Kraljic model.
4. What is the downside of this type of analysis?

• Does not consider the impact of the categories or market complexity
• Does not provide strategic guidelines/recommendations
5. Discuss how risks are handled?

• Risks need to be identified and classified by the business. A risk register is used to identify
all possible risks and size or impact and occurrence.
Risk Score:
Total risk = Likelihood x Impact
Once the risks have been identified and classified, the business will look at mitigation strategies.
Having a strong relationship with a supplier can support a business with mitigation should one
of the risks occur.
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6. What are the benefits of spend analysis?
• Reduced costs
• Lower inventory levels
• Improved supplier management
7. What is the purpose of the Kralic model?

Is used for supplier positioning based on value and balanced against the risk of the purchase.
The aim of the model is for the buyer to maximise its buying power whilst minimising risk to the
organisation.
Allows the buyer to perform category management and select an appropriate strategy for each
type of product/service.
It allows for procurement to identify strategic suppliers to focus relationship management efforts
on.
8. Explain the use of the Kraljic model?

Consists of two axes – Financial risk and Supply risk.
Financial risk:
Will take into account all costs & financial risks to the business. These are internal to a
company.
Supply risk:
Will take into account risk in the marketplace. These are external to the company.
Consists of four quadrants – Routine, Bottleneck, Leverage & Strategic.
The quadrant into which the product/service is plotted will determine the relationship approach.
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9. Per Lyson and Farrington what steps can you use to segment suppliers?
• Make a list of all products/services purchased (by value)
• Evaluate the supply risk and market complexity for each item
• Evaluate into which quadrant each product/service will fit
• Regularly review to assess risks & identify new opportunities
This supports SRM – strategic suppliers for relationship building & development.
The Kraljic model segments products/services & not companies.
10. What are the benefits of using the Kraljic model?

• Simple to understand and apply
• Can be applied across all industries and company types
• Allows for a better understanding of the cost & risk of procuring an item/service
• It will illustrate the optimum relationship for each purchase/supplier
• Can show the likely bargaining position of the buyer
• Can provide additional insight into strategic issues
11. What are some of the limitations of the Kraljic model?

• Not always easy to classify products/services into one of the four quadrants
• Element of subjectivity involved in the classification
• The analysis is a snapshot of time since the marketplace is changing
• The analysis is based on the product/service and not the supplier
• Risks outside the scope of the buyer/supplier relationship are not accounted for
• Limited academic foundation
12. What is the supplier preferencing model?

• Is used by the supplier to gauge the type of relationship they want to have with the buying
organisation.
Consists of two axes – Account attractiveness and Relative value.
Attractiveness
• Profitability of account
• Opportunities for growth
• Stability of future contacts
• Generate reputation of the buying organisation
• Ethical trading practices
• Willingness to collaborate on projects, including sharing of risks and costs
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Relative value
• The greater the value, the buying organisation will be viewed as a preferred customer
13. What is the advantage of the supplier preferencing model?

• Improves the supplier’s view of the best strategy to move to the desired relationship.
• Provides the buyer with information it was unaware of
14. What are the limitations of this model?

• Provides a snapshot time
• It is subjective information
15. What is the market management matrix?

Is a combination of the Kraljic & Supplier preferencing model.
Allows the buying organisation to understand where its requirements are & how it is viewed by
the market.
If the buyer/supplier relationship is not aligned, the buyer needs to take action to reduce its risk
exposure.
The buyer will need to influence the supplier to align its perception of the relationship with the
buyer's objective for the relationship.
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16. What are the benefits of this model?
- Shows which suppliers are open to partnership development
- Can indicate actions to be performed – a change in supplier if the buying organisation is
viewed as a nuisance or exploitable indicates where a change in relationship, rather than a
change in the supplier is required
17. What needs to be done with the insights gained from the relationship
models?
The purchasing department will use this information to create SRM action plans.
Procurement will need to include key internal stakeholders – operations, sales & marketing, to
create a cross-functional working group.
This will entail the review of the current SRM activities and defining each of the existing
relationships.
The team will then create a plan showing where each relationship needs to move.
This will include developing strategies & objectives that will enable progress to be measured and
tracked.
The action plans will also include plans for communication & collaboration.
Plans can be monitored and evaluated by using PLAN-DO-CHECK-ACT (PDCA) Cycle.
Buyers need to review if there is a ROI (Return of Investment) of the time spent developing
supplier relationships.
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L4M6
Chapter 1.3
1.3 Identify the competitive forces that impact relationships in the supply
chain
Competitive forces are constantly at play in the market. They evolve & change over time as
the industry structure changes.
These changes affect supplier & buyer power which has a direct impact on relationship
management.
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1. What is the aim of achieving a competitive advantage?
A competitive advantage allows a business to ensure its survival in the market. This will ensure
that it is profitable and sustainable.
This is important in competitive markets, where there is a large number of companies fighting for
market share.
Competitive advantage should not be confused with market leadership.
2. What are the elements to select a competitive strategy?

• The attractiveness of industries for long term profits
• Factors that determine relative competitive position within an industry
It involves a company’s response to the marketplace and its attempt to shape the marketplace
for its gain.
This will allow the company to generate greater profits.
3. List Porter’s generic strategies for competitive advantage?

Cost leadership
• The company aims to be the lowest-cost producer in the marketplace
• The company can pursue economies of scale, standardising its products or obtain new
technology
• Selling a standard or budget product
• If there is more than one cost leader, the rivalry will be fierce
• Differentiation
• A company will seek to be unique in its product, marketing strategy or distribution setup
• Due to its unique offering, it can charge a premium price
• The premium price must exceed the costs of the unique offering
• Can be more than one differentiation strategy in the marketplace
• These companies should still follow cost leadership strategies provided they do not sacrifice
differentiation
• Focus (Cost focus & differentiation focus)

• A company selects a segment in the marketplace & focuses its strategy on that
• In cost focus – a company seeks differentiation in its target segment
• It is used for long term planning and growth
• Depending on the industry, there may be a few opportunities for focus
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Cost leadership & differentiation focus on the whole

market
Cost focus & differentiation focus are targeting niche

markets
4. What objectives are relevant to procurement in terms of gaining a

competitive advantage?
Cost leadership
• Review the market for new suppliers
• Improve economies of scale (EOS)
• Look for opportunities to source from low-cost countries
• Look for opportunities to standardise/use substitute products
• Reduction in waste
Differentiation
• Identify suppliers that can support the ‘unique’ element in your product/service
• Encourage ESI (Early Supplier Involvement)
• Achieve a high % of savings/reduce costs
Focus
• Source a supplier that can support the needs of niche buyers
Cost focus
• Select a supplier that supports the buying organisation in offering a product/service
that the market can afford – This may include low-cost country sourcing
• Make use of ESI for a niche market
Differentiation focus
• Make use of ESI to add value especially if the product/service is innovative
Competitive strategies involve an element of risk and they are vulnerable to attacks from
competitors. Poor strategic choices can weaken a company’s competitive advantage.
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5. What other elements can be used to develop a company’s competitive
advantage?
HR management, staff & skills
Team member's tacit knowledge needs to be protected
Organisation culture & structure

To drive success, the organisation needs to have a culture & structure.
It will drive the employees forward towards a shared mission & set objective
Processes & practices

The ability to do some things better and cheaper gives the organisation a competitive
advantage.
Being first in the market allows organisations to charge a premium price until competitors catch
up.
Products & IP
IP is a key in the technological & design industries.
Captial
Access to capital gives organisations an advantage to bring products faster to the market and at
a low cost.
This allows them to invest in the latest technologies and processes.
Natural resources
Access to natural resources offers an organisation a competitive advantage.
Technology
Having access to the latest technology is a competitive advantage.
To achieve a competitive advantage, a company can develop internally or externally focussed

strategies.
Once such an externally focussed strategy that links directly to SRM is the development of a
strategic alliance.
If successfully implemented & managed it can bring significant competitive advantage to a

company.
6. What is Porter's value chain?

It is a series of activities & processes that an organisation must undertake to create value for its
customers.
Value is added at each step of the chain. The more value that is created, the more profit that
will be generated.
The value is passed onto the customers, thus consolidating a company’s competitive
advantage.
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The chain enables a company to understand which activities add value & which are wasteful
and therefore be eliminated
7. What are the Five rights of procurement?

• Right Place
• Right Time
• Right Quantity
• Right Quality
• Right Price
At times there will be a trade-off between the ‘rights’ & the ‘needs’ of the organisation.
8. List the different types of markets?

• Monopoly
• Oligopoly
• Imperfect competition
• Monopolistic competition
• Perfect competition
9. List the differences between each type of market?

Monopoly
• A single supplier that controls the marketplace
• Buyers have to sole source from this supplier
• Bargaining power with the supplier is strong
• E.g. - Utility companies
Oligopoly
• The market is dominated by a few large suppliers
• The cost of entry is high
• Supplier power is strong, however alternate sources of supply can improve a buyer's
position
• E.g. - The oil industry
• Governments monitor these markets with laws against price-fixing & collusion
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Imperfect competition
• Number of suppliers in the marketplace, but selling different products/services
• Competition is not strong
• Each seller is following a different strategy
• Monopoly & oligopoly are examples of imperfect competition
Monopolistic competition
• Companies in the market are selling similar products/services but are not perfect substitutes
• They have a low level of market power & are all price-makers
• Demand is high – price elastic
Perfect competition
• The market consists of a large # of suppliers selling identical products/services
• Large # of buyers possible
• Competition is at its greatest level
• Perfect knowledge of the market – All buyers & consumers have perfect & instant
information on prices, usage & costs
• No barriers to entry or exit
• Price takers – cannot influence the price charged
• Large cost in advertising & marketing
10. What factors tend to affect rivalry in a market?

• Industry growth or decline
• Product differences/brand loyalty
• Switching costs – if the cost of switching between products is low, then the rivalry will be
intense
• Diversity of competitors
• Exit barriers
11. What are the barriers to entry (threat of new entrants)?

• Economies of scale
• Access to capital & high start-up costs
• Licences & permits
• Strong brand identities
• High switching costs
• Access to distribution networks
• Government policies – protectionism of local industry
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12. What are the factors that affect substitutes (threat of substitute
products/services)?
• If there are few barriers to entry, a new business will enter & develop substitutes
• Buyers can put up their barriers (define requirements) to encourage or discourage new
products/services
• The price-performance of substitutes – if cheaper, buyers will more likely switch
• Switching cost of buyers
• Inclination to change & how they value economic benefits
13. What are the factors that affect supplier power (power of suppliers)?
Supplier power is highest in monopolistic markets. This is often the case for OEM equipment.
• Suppliers can differentiate their offering
• Switching costs are high
• Lack of substitute products/services
• # of suppliers in the marketplace
If the supplier power is strong, suppliers will have little reason or no reason to invest in building a
relationship with the buying organisation.
14. What factors affect buyer power (power of buyers)?

• Buyer power is at its highest level when there is competition in the marketplace and the
buyer is dominant.
• The buyer can exert its control by making specifications be written in a way that shifts power
to the buyer – removal of branded products from the specification.
• The greater the # of buyers vs # of suppliers is called a monopsony
• The volume of purchases made by buyers
• Costs for buyers
• Availability of information for decision making
• Ability to backwards integrate
• Substitution of products/services
• The high level of power will determine who will be dominant in the relationship
If both parties have low power they will be dependent on each other.
In both cases, there will be a level of risk.
15. What is the purpose of STEEPLE analysis in the supply chain?

PESTLE analysis was changed to STEEPLE since ‘ethical’ was added.
The model is used to analyse external influences & risks (macro environment) that can affect a
company or market.
It can be used to guide & support an organisation in strategic decision making due to any
changes in its external environment.
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16. Explain the elements of STEEPLE analysis?
Social
• Relates to population trends
• These trends will affect workforce planning & buying patterns
Technological
• Relates to the acceptance of technology by companies & consumers
• Technology is a major disruptor in the market and can affect how consumers & companies
interact with each other. This can have an impact on the company’s external environment
Economic
• This covers areas of finance, ex-rates & interest rates, minimum wage, living wage and
changes to pensions
• These factors will affect how consumers spend their money & will have a direct impact on its
profit margin
• Countries also pass through a business cycle – times of economic growth, slow-down,
reduced economic spending, recession and then recovery & growth again.
Environmental
• Relates to the environmental impact of doing business.
• Make use of clean energy sources, water, wind, solar, and biomass and operate sustainably.
• Governments pass laws to reduce the environmental impact of doing business
• The company also introduces CSR policies, for environmental benefits & ethical sourcing
Political
• Refers to government policies & stability regarding global trade agreements & restrictions
such as tariffs & import duties.
Legislative
• Refer to the laws that a company needs to abide by to continue operating
• Organisations need to keep up to date with legislation that could affect their business
Companies operating globally also need to ensure they meet the necessary legislation
requirements of the counties in which they operate.
Ethical
• Relates to how a company operates in terms of labour, sourcing policies & environmental
issues
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Chapter 1.4
1.4 Sources of added value that can be achieved through supply chain
relationships
Procurement is a key part of the value chain & can add value by making sourcing decisions
that result in better outcomes.
Added value is the range of benefits to the buyer, seller, stakeholder or user.
Added value is delivered by the time spent on developing these relationships which deliver
value to the business.
This process starts with segmentation, reviewing where the relationship needs to be to add
value. Plans are then developed to achieve this.
Thereafter relationships need to be maintained to continue to deliver benefits.
The buyer needs to ensure it gets a positive RORI (Return on Relationship investment).
Procurement can therefore enable the delivery of several added value benefits –
• Cash savings/cost avoidance
• Competitive advantage over others
• Making use of collaborative relationships
• Risk management –allows for a greater knowledge of supply chain partners & their risks
which will affect downstream partners
• Improved business efficiency
• Improved CSR
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1. What is a value network?
Is a set of connections between organisations interacting with each other, which benefits the
entire group by supporting each other & adding value.
Also known as ‘economic ecosystems’.
Allows buyers & sellers to gain a competitive advantage.
As well as products/services moving through the value network, information is also shared.
2. List the value chain key points?

• Value is added to its inputs to create value for the customer
• This will generate a margin (profit) for the company
• The activities in the value chain are interdependent
• Waste across the value chain should be eliminated
• The attractiveness of industries for long term profits
3. List how procurement can influence the pricing for products/services?

• Reducing the unit cost paid for a product/service
• Getting additional products/services for the same price – value adds
• Increasing the payment terms from 30 days to 60 days
• Mitigating a requested price increase
4. What are the methods that a supplier can use to price a product/service?
Cost-based pricing
• Total cost plus markup
Mark-based/demand pricing
• Pricing that stimulates demand for a product.
The procurement department needs to be aware of any market factors that can cause an
increase in prices.
5. What elements need to be considered when developing the specification?

• Ensure that the specification is not over-specified
• The specification needs to be clear & unambiguous so that prices are not over-inflated due
to uncertainty
• Ensure all spending is within agreed rates
• Review the use of non-branded alternatives
• Make use of ESI to reduce cost
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6. What method of costing can be used to see the total costs for comparison
with other suppliers?
The buyer will request open book costing from the supplier. This will allow the buyer to see all
the costs – labour rates, material costs, overheads & % of profit margin, as well as any
contingency.
Normally undertaken with strategic and partnership type suppliers.
7. What is whole life costing (WLC)?

Applies to the purchase of a product. Looks at all the costs that are incurred, which are invisible
on the price – Cost iceberg.
• Pre-acquisition costs
• Cost of the procurement process
• Transport/delivery/insurance during carriage
• The actual cost of the item
• Operating & maintenance costs over the life of the item
• Disposal costs/residual value at the end of the items life – these costs can only be estimated
Not all costs that will occur can be forecasted. WLC can be costly & time-consuming.
8. What are the other sources of automation to achieve savings?

• E-auctions (reverse auctions) – routine or leverage categories
• Procurement cards
• E-catalogues
9. Why should negotiation not erode a supplier's profit margin?

It makes the contract not sustainable & prone to collapse in the future.
10. How does procurement add value during contract management?

Ensure supplier commitments are met & adherence to the agreed KPIs which will achieve
greater value for the organisation.
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11. What elements need to be considered concerning the quality of
products/services?
• Fit for purpose
• Whether the products/services meet the specification
12. List & explain the two types of specifications?

• Conformance specification
• A detailed description of what the part or product must consist of.
• The supplier must conform to the specification.
• Mainly used for products – input based
• Performance/output specification
• Describes what it expects a part, material or service to achieve.
• Mainly used for services – output based
13. What is the impact of poor quality on an organisation?

• Cost of rework
• Cost of downtime
• Poor quality products/services reaching the end customer, which affects the organisation's
reputation
The appraisal of the supplier's quality accreditation & how it manages quality in its supply chain
is important.
14. What are the four processes to ensure the right quality?
• Quality planning
• Control
• Assurance
• Improvement
15. What is the difference between quality control and assurance?

Quality control is the process of controlling variation. Spot checking of first-off samples to verify
if it meets the standards.
Quality assurance – is the process of managing quality – Involves systems and processes.
16. What is value?

Value analysis/value engineering is a review of a parts specification, design, and process used
for manufacturing and eliminates non-value-adding steps to reduce costs.
This process is linked to ESI.
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17. Why are timescales important?
Products need to arrive at the correct time to ensure that the business & manufacturing
processes remain operational.
18. Delivery KPIs are measured to avoid the following issues?

• Production bottlenecks or stoppages
• Lost time costs/standing time costs
• Added costs for late delivery to a customer – reputation damage & late delivery charges
19. How can lead times be shortened?

• Paying a higher price for shorter delivery times
• Business improvement activities to shorten the time to convert a PR into a PO
• Removal of waste activities in the order process
• Holding more stock – you need to consider the impact on cash flow & additional;
stockholding costs
20. List the benefits of holding stock?

• Ensures continuity of supply in the event of unforeseen events
• Allows for reduced lead times
• Potential discounts for buying in bulk
• Holding stock can protect against price fluctuations
• Can support demand management – can be based on historical demand forecasts
21. What are the costs associated with holding stock?

• Costs of storage space – warehouses
• Cost of stock holding – capital costs
• Opportunity costs
• Obsolescence costs (depends on the type of product)
22. What method can be used to ensure stock is available at all times?
JIT (Just in Time) – works with lean manufacturing. regards inventory as waste.
The objective of JIT is to hold zero inventory across the supply chain.
JIT ensures that parts are pulled through the system when & where they are needed, helping to
reduce waste.
JIT results in cost savings, improved cash flow & space utilisation. It is not appropriate for all
businesses & does not allow for the risk of unexpected events that affect the supply chain.
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23. What is Vendor Managed Inventory (VMI)?
This is when the vendor decides on the amount of stock that they will keep for the buyer &
replenishment times. These decisions will be made by reviewing the forecasts & other demand
data.
24. What is meant by the term supply chain?

Refers to the links between these value networks (relationships between buyers & sellers),
ensuring end customers' needs are met.
Results in a collaborative attitude among all members.
25. What is agile?

Is it a process adopted by organisations to bring new products to the market in the shortest
period? It was developed in response to external pressures from volatile markets & short
product life cycles.
Close buyer-supplier relationships are required for agile supply chains.
26. What is TQM?

Developed to improve quality at every level of the organisation.
27. What are the benefits of TQM?

• Allows companies to have more formal mechanisms for interacting with a supplier
• Allows or co-operative approaches to be used with suppliers
• Allowed for formal reward & recognition programmes, degree of supplier training, degree of
formal evaluation of procurement personnel
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CIPS_STUDY

It is not necessary or beneficial to form a close relationship with all suppliers.

1 L4M6 Chapter 1.1

2. What are the benefits of an ‘in-house’ supplier?

These core products/services provide the organisation with a competitive advantage.

3. What is the process for a make-or-buy decision?

Non-price factors such as quality need to be considered.

4. List the advantages of using an internal supplier?

5. List the disadvantages of using an internal supplier?

2 L4M6 Chapter 1.1

7. How do you manage an internal supplier?

9. What factors need to be considered when using an external supplier?

10. What is the underlying need that procurement needs to do when

11. List the advantages of using an external supplier?

3 L4M6 Chapter 1.1

13. What is the relationship spectrum?

14. List the different types of relationships as per the spectrum?

4 L4M6 Chapter 1.1

5 L4M6 Chapter 1.1

This results in a high level of inter-dependence.

A JV is an example of a co-destiny relationship.

18. Explain the elements of the relationship life cycle?

6 L4M6 Chapter 1.1

Risk management will also be carried out for strategic contracts.

The frequency will depend on how strategic the contract is.

Development and Innovation

It will result in measurable benefits and involve change management.

19. What are the reasons for supplier development?

20. What are the benefits of supplier development?

7 L4M6 Chapter 1.1

22. What are the steps for introducing a new supplier?

23. What are the phases of a relationship cycle?

8 L4M6 Chapter 1.1

Kraljic model (Supplier positioning)

1 L4M6 Chapter 1.2

2. List procurement objectives that can be supported by the use of portfolio

3. Explain the Pareto analysis?

This analysis shows where costs sit.

4. What is the downside of this type of analysis?

5. Discuss how risks are handled?

2 L4M6 Chapter 1.2

7. What is the purpose of the Kralic model?

8. Explain the use of the Kraljic model?

Consists of four quadrants – Routine, Bottleneck, Leverage & Strategic.

3 L4M6 Chapter 1.2

10. What are the benefits of using the Kraljic model?

11. What are some of the limitations of the Kraljic model?

12. What is the supplier preferencing model?

Consists of two axes – Account attractiveness and Relative value.

4 L4M6 Chapter 1.2

13. What is the advantage of the supplier preferencing model?

14. What are the limitations of this model?

15. What is the market management matrix?

5 L4M6 Chapter 1.2

Plans can be monitored and evaluated by using PLAN-DO-CHECK-ACT (PDCA) Cycle.

6 L4M6 Chapter 1.2

1 L4M6 Chapter 1.3