L4M1 SCOPE AND INFLUENCE OF PROCUREMENT AND SUPPLY

Questions: Chapter 1

Question 1: Dragnet

Dragnet is a well-established company providing cloud computing services from its multimillion
dollar processing centre. The company has many clients who have switched large parts of their IT
operations to ‘the cloud’. The processing centre houses large computer servers, cabling and other IT
equipment and infrastructure, together with MRO supplies, mainly replacement parts for repairs and
maintenance to IT equipment. The floor space for MRO supplies and associated handling and storage
equipment (such as robotic forklift trucks and racking) takes up about 10 per cent of the floor space
in the centre.

Although the company has invested heavily in IT equipment, a large proportion of its operational
costs consist of salaries for skilled consultants and operating staff.

Demand for Dragnet’s services occasionally exceeds the capacity of the processing centre, and in the
past Dragnet has agreed with some clients that during busy periods their work may be offloaded
(subcontracted) to a small external cloud computing services company. However, Dragnet’s
management is not satisfied with this arrangement and the company intends to acquire another
building next year and install further equipment in order to increase its computing capacity for
clients. This will also require further addition to its warehouse space for MRO supplies.

A brief summary of the financial performance of Dragnet for the past two years, and its budget for
next year, is shown in the following table.

Year just ended Previous year Budget

(Year -1) (Year -2) for next year
$000 $000 $000
Sales revenue 45,000 41,000 50,000
Operating expenses 33,200 28,500 35,000
Capital expenditure 12,900 8,100 62,000

Using examples from this scenario, describe FIVE features of capital equipment procurement that
makes it different from procurement of operational supplies or services.

(25 marks)
Question 2: MC Squared

MC Squared is a company that provides mobile phone, television and internet services. One of
its operating services is the provision of customer advice and assistance through a call centre.
MC Squared has outsourced its call centre services to an external service provider. There are
problems with the service provided by the call centre, which has difficulty in dealing with calls,
especially during busy periods, in spite of using call back and ‘chat line’ options for customers
that do not want to hold on waiting for service when they call the centre for help. Customers are
invited to give feedback on their satisfaction with the service they receive from the call centre,
and on a scale of 1 to 5, the average feedback score is 2.6.

MC Squared has a service level agreement with the call centre service provider, but there are
difficulties in measuring service standards.

MC Squared intends to monitor the standard of the call centre’s services, because management
is concerned that unsatisfactory service will affect the company’s plans for increasing subscriber
numbers and market share.

Explain THREE problems that exist in establishing service level agreement specifications for
service quality to customers, and TWO measures that might be taken to monitor actual service
performance standards. Refer to the MC Squared scenario in providing your answer.

(25 marks)
Question: Chapter 2

Q3: Hospital

In a country with a public sector hospital service, each region has a centralised procurement
department which obtains medical supplies, including medicines and drugs, for all the hospitals in
the region. The costs of treating patients in hospitals are increasing, but each region has strict
budget limits on the amount of money they can spend on hospital supplies. Although there is
centralised purchasing of supplies for each region, deliveries are made by suppliers to each hospital
individually, and supplies are stored in each hospital until they are needed and used. There is a very
wide range of medical supplies, drugs and medicines that each region procures and uses in its
hospitals.

A guiding principle of procurement is to obtain the right quality and quantity of product items, at the
right time, delivered to the right location and at the right price.

With reference to the procurement function in the above scenario, explain the importance of each
of the 5Rs for obtaining value for money in procurement.

(25 marks)

Reference Chapter 2 Sections 3–7

Question: Chapter 3

Question 4: SCM

(a) Describe how supply chain management differs from procurement management.

(15 marks)

(b) Explain the advantages and disadvantages of supply chain management, compared to
‘traditional’ procurement.

(10 marks)

Reference Chapter 3 Section 4

Question: Chapter 4

Question 5: Stakeholders

A company manufactures a range of consumer products, buying raw materials and components
from suppliers in other countries and selling finished goods to customers in its domestic market.

(a) Describe briefly the main types of connected stakeholders in this company, and the nature
of their interest in the company and its business.

(10 marks)

(b) Explain with examples the different approaches that the company might take to managing
its connected stakeholders.

(15 marks)
Question: Chapter 5

Question 6: Good practice in procurement

A newly appointed head of procurement is reviewing the systems and processes for procurement
within the department. Surprisingly these are not well set out, and there is some lack of consistency
in the procedures used by different members of the procurement staff. The head of procurement
decides that it is time to establish good practice within the department.

(a) Explain the meaning of good practice within a procurement function, and how good practice
may not be ‘best practice’.

(12 marks)

(b) Explain how compliance with good practice will help the procurement function to achieve its
desired outcomes.

(13 marks)

Reference Chapter 5 Section 2

Question: Chapter 6

Question 7: Value added

How is value added during the following stages in the sourcing process?

(c) Defining needs

(12 marks)
(d) Supplier selection

(13 marks)

Reference Chapter 6 Sections 1 and 2

Question: Chapter 7

Question 8: E-procurement

What are the potential benefits of each of the following aspects of e-procurement compared to
‘traditional’ procurement methods?

(a) E-requisitioning
(6 marks)
(b) E-sourcing
(6 marks)
(c) E-tendering
(13 marks)

Reference Chapter 5 Sections 1.4, 2.1, 3.2, 3.4

Question: Chapter 8

Question 9: Governance in procurement

A company has a code of conduct that establishes a governance structure for the procurement
function.

(a) What is the meaning and purpose of governance with regard to the procurement function
and what are the main elements of a system of governance for the procurement function?
(15 marks)
(b) Explain the nature of a conflict of interest for members of a procurement team and suggest
how the risks from actual or potential conflicts of interest should be managed? (10 marks)

Reference Chapter 4 Primarily Sections 1 and 2 but much of the chapter is relevant.
Question: Chapter 9

Question 10: Structure of Procurement

The organisation of the procurement function can differ widely between organisations.

(a) What factors are likely to influence the design or organisation structure of the procurement
function within a commercial organisation?

(10 marks)

(b) What are the advantages of centralised procurement arrangements within a commercial
organisation over devolved procurement arrangements?

(15 marks)
Question: Chapter 10

Question 11: Improving Performance

Explain the ways in which IT systems can improve the performance of procurement and supply
operations.

(25 marks)
Question: Chapter 11

Question 12: Classifying organisations

From the perspective of the procurement function, what is the relevance of:

(a) classifying organisations into public, private and not-for-profit sectors?

(12 marks)
(b) classifying businesses into industrial sectors?

(13 marks)
Question: Chapter 12

Question 13: Public sector regulation

(a) For what reasons is procurement in the public sector usually closely regulated?

(16marks)

(b) Explain how procurement practices in the public sector may be regulated.

(9 marks)
Question: Chapter 13

Question 14: Branding

What is the role and importance of branding for procurement and for the supply chain in general?

(25 marks)

Suggested points for an answer

This question deals with the importance and role of branding, which is the final item listed in the
syllabus for this subject. The points to include in an answer are largely inter-connected, and although
there may not be many points to make, they should be presented clearly, with full explanations or
commentary.

The suggested points given here are in note form only. Alternative or additional points might be
equally valid for an answer to the question. Points that might be discussed are as follows.

 Branding adds value to a product (or service). The price that consumers are willing to pay for
a product depends largely on the value they get from using the product (use value), but also
from their perceptions of the esteem associated with ownership of a branded product.
Consumers will pay more for a product with an ‘expensive’ brand name, because it can add
to perceptions of social status.
 However, companies use a combination of product features and brand name (use value and
esteem value) to position their products in the market. Just as there are expensive brands,
so too are there ‘cheap’ brands, where the manufacturer pursues a low-cost ow-price
strategy. Branding therefore has a role in the differentiation between similar products, for
example cars.
 For procurement, it is important that the costs of purchased materials or services should be
consistent with the brand image and product price. There is a connection between brand
and product quality, and between product quality and cost.
 Provided that product quality matches the brand image, branding can give a company a
competitive advantage over its competitors.
 Companies that produce branded products should want consistency of quality in the items
they produce, and in their entire branded product range. As a consequence, companies may
seek to establish long-term business relationships with key suppliers, as a way of helping to
ensure consistency in materials quality.
 Brand image may also affect distribution strategy in the supply chain. In particular,
companies producing ‘expensive brand’ goods may not want to use the same distribution
channels and outlets as those used by manufacturers of cheaper branded goods.
 Branding is usually important only for consumer products. Buyers of non-consumer products
and commercial buyers of consumer products are much more likely to focus on cost and
other aspects of procurement such as quality and order cycle times. Commercial buyers do
not see value in buying branded products and so, as a general rule, are unwilling to pay for
‘esteem’
Solutions and Feedback: Chapter 1

Q1: Dragnet

The question asks for five points, but each point should relate to an item of information in the
scenario. The suggested points given here are in note form only.

1 With capital expenditure the amount of spending can be very high, and may exceed the
company’s profits for the year in which the expenditure occurs. This is evident in the
budget for next year, where the operating profit is $15 million but capital spending is
$62 million. (Answers may also mention the possible problem in finding the finance to
pay for the spending.)
2 The benefits from capital expenditure are not felt immediately. This is also evident from
the budget. The large outlay of $62 million next year is not expected to result in higher
revenue and profits immediately. In this respect, capital spending differs from additional
spending on supplies, services and in-house labour.
3 Capital spending often results in a need to hold MRO supplies – parts for repairs and
maintenance. This is evident with Dragnet. This requires space and access in the
processing centre.
4 MRO supplies in turn give rise to a need for further capital spending. Dragnet has to buy
materials handling equipment and equipment for storing the supplies. In addition, the
extra space the company is planning to acquire next year – also capital expenditure,
unless the space is to be rented – will include more space for MRO supplies and so will
cost extra money.
5 Capital expenditure is non-recurring or irregular, unlike operational spending. The
amount spent by Dragnet each year does not have a direct relationship to the size of
operations (measured perhaps by annual revenue).
6 The need for MRO supplies, and warehousing for those supplies, indicates that with
capital purchases, the whole life cost should be considered. In addition to the cost of
purchasing new equipment (and installing it) there are costs of staff training, costs of
repairs and maintenance, and probably also costs of obsolete MRO items that get out of
date before they are used, and possibly also costs of disposal of equipment at the end of
its life.

Six points are listed here, but only five are needed for an answer. Other points may be relevant
and acceptable, but they should be illustrated by reference to information provided in the
scenario.

Reference Chapter 1 Sections 5.1–5.3

Q2: MC Squared

Each point in the answer should make some reference to the scenario in the question. The
suggested points given here are in note form only.

Service level agreement and service quality

1 There are problems with variability in the nature of the service provided. Time to answer can
be measured, but this can depend on the complexity of customer queries or requests for
assistance, and the time required to deal with them.
2 Even when some information can be obtained about service quality, such as customer
feedback, there may be doubts about whether feedback comments reflect the experience of
all customers. The people who provide most feedback may be those who have a complaint,
not those who are satisfied with the service they receive.
3 It is difficult to measure service quality against objective and quantifiable standards, for
inclusion in a service level agreement.

Methods of monitoring

1 MC Squared may include in the SLA a right to monitor the standard of service that is being
provided. For example, the company may have the right to conduct an occasional quality
audit or spot check of work in the call centre.
2 The company may include a target minimum feedback score in the service level agreement,
but feedback is qualitative and judgemental, and depends on the willingness of customers to
provide feedback.
3 MC Squared should meet occasionally with the service provider and conduct a collaborative
review of performance, to identify any problems and consider ways of improving service
performance standards

Reference Chapter 1 Sections 6.2–6.4

Solutions and feedback: Chapter 2

Q3: Hospital – suggested points for an answer

Most of Chapter 2 and Section 1.2 of the syllabus are concerned with the 5Rs of procurement. The
basic principles should be straightforward, but the challenge in this question is to apply the
principles to a particular scenario. Answers should explain how or why the principles should apply in
practice.

The suggested points given here are in note form only. Alternative points might be equally valid for
an answer to the question.

1 Right quality
Purchased supplies, including medicines and drugs, should be ‘fit for purpose’ and
perform the function that is expected of them.
Are the selected supplies, drugs or medicines effective enough, or are there more
effective alternatives available in the market?
Are the disinfectants and other cleaning materials purchased adequate for eliminating
germs and preventing the spread of any infection?
2 Right quantity
The centralised procurement function should try to avoid purchasing excessive
quantities of supplies and medicines. If too much of an item is purchased, there might be
insufficient funds to buy other items that are needed more urgently; and the excess
quantities must be held in store (possibly at risk of damage or theft).
If insufficient quantities are purchased there will be stockouts, and some patients will
not receive the treatment they need at the time they need it.
3 Right time
Supplies must be delivered at the times they are needed. Late deliveries could result in
stockouts, and some patients will not receive the treatment they need at the time they
need it.
4 Right location
The centralised procurement function buys supplies for all the hospitals in the region,
and deliveries are made by suppliers directly to hospitals.
It is important that each hospital should receive the supplies that it needs, and that
supplies should not be delivered to the wrong hospital.
For the procurement function, specifying delivery locations, and getting suppliers to
deliver to the correct locations, can be a complex task when a widely used item is
purchased in bulk, for splitting up and delivery to a number of different hospitals.
5 Right price
The procurement function is operating within tight budget constraints, so it is crucially
important that it should obtain fair prices for the items that it buys. Paying too much will
mean that fewer supplies can be purchased within the budget limit.
It can be important to negotiate price discounts for bulk purchase orders: a state-run
hospitals service will presumably buy many of its supplies in large quantities.
The price of branded medicines and drugs that are protected by patent can be very high,
but when the patent period runs out, other manufacturers may produce generic drugs
and sell them at a much lower price. (Generic drugs are copies of patented drugs that
have exactly the same dosage, intended use, effects, side-effects, risks, and strength as
the original patented drug.) The procurement department should maintain an up-to-
date awareness of generic drugs coming to the market, and consider buying them.
Solution and Feedback: Chapter 3

Question 4: SCM – suggested points for an answer

The suggested points given here are in note form only. Alternative or additional points might be
equally valid for an answer to the question.

(a) Points that might be discussed are as follows.

 With supply chain management (SCM) there is much greater focus on the organisation’s
entire supply chain, downstream as well as upstream. SCM also includes the management of
logistics and warehousing, as well as purchasing activities, whereas in a more ‘traditional’
organisation structure, logistics management and procurement might be separate.
 With ‘traditional’ procurement, the organisation deals with a large number of suppliers.
With SCM, the organisation is likely to focus on its relationships with a limited number of key
‘Tier 1’ suppliers, who in turn will be held responsible for the performance of Tier 2
suppliers, and so on.
 With SCM, supplier relationships tend to be developed for the long term, on a win-win basis.
For example, an organisation may be able to set up a joint R&D or new product
development initiative with an established supplier. With ‘traditional’ procurement, there is
more emphasis on competitive bidding for larger contracts.
 SCM lends itself to policies of corporate social responsibility. Companies can use their
influence in an integrated supply chain to put pressure on upstream suppliers to develop
and implement sustainability policies.
(b) Potential advantages of SCM
 By integrating the supply network through to the end customer, SCM should be able to
deliver better value to the end customer.
 SCM can make some aspects of e-procurement to be applied when it is more difficult to do
so with traditional procurement (eg e-ordering).
 There should be greater transparency and understanding of activities throughout the supply
network. This can help to find ways of reducing costs in a supply chain or speeding up
deliveries (eg by identifying and eliminating inefficiencies).

Potential disadvantages of SCM

 The management time (and financial investment) needed to make SCM successful.
 There may be a risk in relying more on Tier 1 suppliers to help with management of the
supply chain.
 There is less reliance on competitive bidding to obtain the best contractual terms for
individual procurement contracts.
 Some suppliers may be difficult to integrate into the organisation’s supply chain network, in
particular suppliers of capital equipment, where a key factor in the choice of supplier for any
major capital item purchase may be the technological features rather than established
supply relationships.
Solution and Feedback: Chapter 4

Question 5: Stakeholders – suggested points for an answer

Reference Chapter 4 Sections 2 and 4

The suggested points given here are in note form only. Alternative or additional points might be
equally valid for an answer to the question, and answers to part (b) may express differing views to
some of the points made here.

(a)

Points that might be discussed are as follows.

 Definition of connected stakeholders. Individuals, organisations or groups that are external

to the company but with contractual or commercial dealings with it.
 Shareholders. Owners of the company. They expect the company to be managed in their
interests and expect returns from their investment, for example in the form of dividends.
 Customers of the company. They have a direct interest in the value they obtain from the
company’s products, in terms of price, quality, convenience etc. As members of the general
public, they may also have an interest in the environmental and social aspects of the
company’s business operations.
 Suppliers to the company. They have a business interest in the company, through supply
contracts which earn them revenue and profit. The extent of their interest will depend on
the amount of business they do (or hope to do) with the company.
 Distributors of the company’s products, such as retailers, including online retail companies.
Their interest in the company depends on the extent of their business dealings.
 External logistics companies that deliver goods from suppliers to the company.
 Providers of finance, such as banks. Their concern is with the amount of lending to make to
the company, and in ensuring that the company is able to repay in full any borrowing with
interest

(b)

The question calls for some examples, without specifying how many. Four examples are suggested
here.

The different approaches to connected stakeholder management can be analysed using Mendelow’s
power/interest matrix. The amount of attention and effort that goes into stakeholder management
should depend on the strength of the stakeholder’s interest in the organisation and its business, and
their power or influence over what the organisation does.

 When stakeholder interest and power are both strong, the company should treat them as
key players. For a manufacturer of consumer goods, end customers and intermediaries
(retailers) might be key players, because they have a close interest in what the company
makes and sells, and have power because they decide whether or not to buy the company’s
products. Stakeholder management might include intensive marketing (advertising, sales
promotions and PR).
 When their power is strong but their interest is low, it should be sufficient to keep
stakeholders satisfied. For example, unless the amount of lending is high, a bank might have
relatively little interest in an individual corporate borrower, but it has the power to take
action if the company defaults on loan payments. To manage its relationship with a bank,
the company should keep it satisfied by making loan and interest payments in full and on
time.
 When their power is fairly weak but their interest is high, it should be sufficient to keep
stakeholders well informed. For example, suppliers may have a high level of interest in doing
business with a company, but unless they are key suppliers their power or influence is
unlikely to be strong. To manage these stakeholders, it should be sufficient to keep them
well informed about the company’s plans and expectations for the future of its business
operations.
 When stakeholder interest and power are both low, only minimal effort should be needed to
manage the relationship with them. This will often be the case, for example, with logistics
firms that deliver goods from suppliers to the company. These may include airlines, shipping
companies and railway companies as well as external road haulage companies.
Solution and Feedback: Chapter 5

Question 6: Good practice in procurement – suggested points for an answer

The suggested points given here are in note form only. Alternative or additional points might be
equally valid for an answer to the question. In this question, part (a) leads into part (b). Part (a) asks
what good practice means and part (b) asks about the benefits of establishing and complying with
good practice.

(a)

Points that might be discussed are as follows.

 Answers should begin with a general definition of good practice in procurement. It consists
of structured processes for achieving a desired outcome.
 Answers should also explain what the desired outcome (or outcomes) of the procurement
function should be. The desired outcome is to achieve value added outcomes. These might
be expressed as a suitable balance between the ‘5 rights’ of procurement.
 Good practice calls for established processes/procedures and decision rules that are applied
consistently.
 These processes/procedures should be set out in an official guidelines document or
procedures manual, which can be used for reference.
 Good practice also calls for the three aspects of added value: economy, efficiency and
effectiveness. Processes should be carried out without unnecessary and wasteful spending,
and spending should be kept suitably under control. Procedures should be performed
efficiently, without unnecessary waste of time and resources. Procedures should also be
effective – they should achieve their intended objective.
 Good practice may not be ‘best practice’ because it is difficult in procurement to establish
what best practice might be. To establish best practice there needs to be a benchmark – ie
something to provide a comparison. Continuing professional education for procurement
professionals and a professional code of practice will help in identifying aspects of best
practice, but these do not provide a comprehensive benchmark.

(b)

Good practice is a systematic approach to procurement. The application of good practice:

 Ensures that all the required tasks are carried out, and nothing is overlooked or forgotten
 Ensures that the efforts of everyone in the department are well coordinated
 Achieves consistency in performance, and so reduces uncertainty about how something
should be done and the risk of error
 Fosters efficiency and clarity in performance: there is no ‘reinventing the wheel’ each time a
task is performed.

Good practice should also lead to achieving desired outcomes, which for procurement means
performing functions in a way that adds value and gives value for money.
A focus on outcomes alone, without establishing good practice and compliance with good practice, is
insufficient. Procurement staff may know what they are trying to achieve, but may differ in their
views about how to set about their task.

Compliance with good practice reduces the risks of disagreement.

Solution and Feedback: Chapter 6

Question 7: Value added – suggested points for an answer

The suggested points given here are in note form only. Alternative or additional points might be
equally valid for an answer to the question. This question is based on the wording of Assessment
Criterion 2.2 in the examination syllabus.

Points that might be discussed are as follows.

(a) Introduction and identifying the need

 Answers should begin with a definition of adding value. For example, an answer might state
that adding value is the addition of benefit to an organisation from an item or activity, in
excess of its cost. Benefits may be non-financial or financial.
 The point may also be made that here we are looking at adding value for the organisation
itself. Eventually this may ‘work through’ to customers, who may be prepared to pay a
higher price for the extra value created.
 Recognising a need and defining it is the first stage in the sourcing process. It is necessary to
establish what benefit or benefits will be obtained from the proposed procurement. Unless a
need is recognised, the potential value cannot be established. Questions to be answered
are: What do we want? Why do we want it? What is the benefit? Defining the need gives
clarity of purpose.
 At this stage of the sourcing process, a business case for sourcing the item should be made.
This will involve estimating the benefits as well as the costs. Benefits may be non-financial or
financial, but they should be sufficient to justify the cost of the sourced item.
 Identifying the need is therefore a stage in the sourcing process where the expected added
value is recognised and established as a target. It gives purpose to the sourcing process.
 Identifying the need should also reduce the risk of sourcing items where there will be no
value, for example because the cost will exceed the expected benefits. As well as adding
value, identifying a need can also prevent loss in value.

(b) Supplier selection

 An aim of procurement should be to obtain the optimum balance of the 5Rs: right quality,
right price, right quantity, right time, right location. Achieving this will add value for an
organisation.
 The supplier selection process should result in the selection of suppliers who are best able to
deliver the 5Rs.
 The selection process can also be used by an organisation to assess the value to be obtained
in other ways, such as better sustainability.
 Having established criteria for supplier selection, it is also possible to prioritise
requirements, for example through a vendor rating system, in order to identify the suppliers
most able to deliver value through the procurement process.
 The supplier selection process also creates awareness among potential suppliers of the
importance attached by the organisation to aspects of value, and this will encourage them to
deliver value.
 Pre-selection of suppliers will also save time subsequently in the procurement process,
reducing the cost of procurement transactions and so adding value.
 Supplier selection should also reduce the risk of loss of value, which may occur if an
unsuitable supplier is awarded a procurement contract.
Solutions and Feedback: Chapter 7

Question 8: E-procurement – suggested points for an answer

The suggested points given here are in note form only. Alternative or additional points might be
equally valid for an answer to the question. Given the allocation of marks in the question, answers
should contain at least three well-explained points for parts (a) and (b), and at least six points for
part (c).

Points that might be discussed are as follows.

(a) Benefits of e-requisitioning

 Faster procurement for regularlypurchased standard items
 Removes the burden of routine procedures from procurement staff
 Integration with MRP, MRPII or ERP systems

(b) Benefits of e-sourcing

 Faster processes for searching for potential suppliers (eg internet search engine)
 Access to a larger number of potential suppliers, including those in other countries
 Fast and secure digital links to established suppliers (eg via an extranet)

(c) Advantages of e-tendering

 Ease of access for potential bidders (via a portal or website)
 Transparency: the same information is made available to all potential bidders
 May include some programmed evaluation of responses and automatic scoring of bids
 Speed of communication in responding to questions during the bidding process
 Better systems for archiving and document management
 Fewer labour-intensive tasks
Solutions and Feedback: Chapter 8

Q9: Governance in procurement

The suggested points given here are in note form only. Alternative or additional points might be
equally valid for an answer to the question. The main purpose of this question is to test the
understanding of students about the meaning and nature of ‘governance’ – a term that is widely
used but not necessarily clearly defined.

(a)

Points that might be discussed are as follows.

Meaning and purpose

Governance of procurement refers to the way in which the procurement function is organised and
led, and the rules, policies, procedures and controls that are put in place to ensure that the function
operates effectively to achieve its intended objectives.

Main elements

 Management and supervision. Governance involves the provision of leadership. Managers

should establish rules of behaviour, communicate these to staff, and ensure that they are
implemented in practice.
 Compliance with laws and regulations, such as laws against bribery.
 Compliance with company policies on procurement, such as policies on ethical procurement
and sustainability
 Establishing rules of behaviour and codes of conduct, such as rules on acceptance of gifts
and hospitality
 Compliance with established procedures for procurement processes (for example,
authorisation of purchases at the appropriate level)
 Controls to limit the risk of errors or misdemeanours, or detecting them when they occur
 Monitoring the effectiveness of controls, for example through audits of the procurement
function
 A requirement that procurement professionals who are members of CIPS should comply
with the CIPS code of Conduct
 There is usually a requirement within governance for ethical conduct.

(b)

A conflict of interest occurs when an individual is faced with differing interests, which could lead him
or her into making either of two different decisions. Typically, a conflict of interest is a conflict
between an individual’s self-interest and the requirement for them to perform their job in the
interests of their employing organisation.

A conflict of interest may also arise when an individual has a choice between doing a favour for a
family member or friend, or doing what is best for the organisation.
Where conflicts of interest exist, the requirement should be for an individual to act in the interests in
the organisation, and not out of self-interest.

An individual may act ethically, but might nevertheless be suspected or accused of acting in self-
interest.

In procurement, a major problem area is the acceptance of hospitality or gifts. There may also be
problems arising from a family connection between a person in the procurement team and an
individual in a supplier organisation.

Conflicts of interest should be managed by:

 Establishing clear rules about the acceptance of gifts or hospitality from suppliers
 Communicating these rules to all members of staff, and emphasising their importance
 Requiring individuals to disclose actual or potential conflicts of interest to their line
manager, so that management can decide how the situation should be dealt with.
Solution and Feedback: Chapter 9

Q 10: Structure of Procurement – suggested points for an answer

The suggested points given here are in note form only. Alternative or additional points might be
equally valid for an answer to the question. The main purpose of this question is to test the
understanding of learners about the way in which companies might organise their procurement
arrangements.

(a)

Points that might be discussed are as follows.

Factors likely to influence the structure of the procurement function in a commercial organisation

 The size of the organisation. In large organisations, each strategic business unit may have its
own procurement function.
 The geographical spread of business operations. When operations are spread globally over a
wide geographical area, a large proportion of purchases may be organised by local
procurement functions.
 The need for specialist skills in procurement. Where there is a need for technical knowledge
for procurement, or procurement skills, there is likely to be a centralised procurement
function, where the required skills can be concentrated.
 The potential for adding value through competitive tendering. Where the organisation
places large procurement orders, there is likely to be scope for adding value through
competitive tendering. This is likely to be organised centrally within the organisation.
 Supply chain management. Effective supply chain management is likely to require a
specialist centralised procurement function.
 Sourcing strategy. If an organisation has a strategic policy for sourcing material and services,
and developing long-term supply relationships or partnerships with suppliers, a specialist
centralised procurement function is probably necessary.

(b)

Learners may mention briefly that even when procurement is largely centralised, there is likely to be
some devolvement of procurement to local management (eg for low-cost indirect materials).

Here are some of the advantages of centralisation of procurement.

 In a centralised organisation, specialist skills can be developed among procurement staff (eg
procurement research, supplier sourcing).
 In a centralised procurement function, it should be possible to organise and coordinate
procurement activities better, for example in managing just in time purchasing
arrangements more efficiently, and monitoring KPIs of major suppliers.
 A centralised procurement function should be able to consolidate purchase orders into
larger quantities, and so obtain a better price from suppliers (for ordering in bulk).
  A centralised procurement function should be able to implement supply chain
improvements more effectively, eg by standardising procurement procedures, and
implementing initiatives for standardisation (and procurement) of product parts
 Control over procurement budgets should be more effective when procurement operations
are centralised
 Developing relationships with major suppliers should be easier to organise and manage
through a centralised and specialised procurement function.

Reference Chapter 9 Sections 1 and 2.

 Solution and Feedback: Chapter 10

Q 11: Improving Performance – suggested points for an answer

This question covers the entire contents of Chapter 10. It asks for ways in which IT (both
communications and processing) can improve performance. Answers that simply state what IT
systems can be used, without explaining how they improve performance, will be inadequate.
Answers that discuss the benefits of IT in general terms (eg speed of processing, processing
accuracy, access to data and information) will not be sufficient unless these are related to specific
systems used within procurement and supply.

The suggested points given here are in note form only. Alternative or additional points might be
equally valid for an answer to the question. Points that might be discussed are as follows.

 A general introduction that sets out briefly the benefits of IT systems: access to more data
and information; speed of communications; improved communications; speed and accuracy
of processing.
 MRP, MRPII and ERP systems. In a manufacturing company, these improve the coordination
between sales forecasting, production planning and procurement planning. These systems
enable the procurement function to plan future requirements for direct materials, and
where appropriate to discuss these requirements in advance with suppliers.
 Use of extranets and other systems of EDI to communicate electronically with the IT systems
of key suppliers. This speeds up the processing of purchase orders, and can also facilitate the
automated handling of purchase orders by suppliers’ systems. They encourage greater
amounts of communication and interchange of information, as well as speeding up
information flows.
 In some cases, IT systems can improve purchasing methods. For example, e-catalogues can
improve the quality of decentralised buying and discourage maverick buying of indirect
materials. Reverse e-auctions are an alternative way to encourage competitive bidding from
suppliers.
 Electronic communications improve the organisation and management of competitive
bidding, for example using eRFQs and e-tendering for large contracts. In an e-tendering
system, the process is also more transparent, because answers to questions submitted by
potential bidders during the bidding period are made available to all potential bidders.
 IT systems can also help with the identification of potential suppliers as sources of supply.
Internet searches and eRFIs can be used to search for and obtain information from potential
suppliers.
 IT systems for inventory management and control enable an organisation to monitor
inventory levels and identify when orders for re-supply of stock items is required. IT systems
are more accurate and efficient than manual inventory control systems. RFID also improves
the efficiency of inventory management by making it easier to locate and control the
movement of items in stock. (Answers may also mention satellite tracking of stock
movements.)
 Warehouse management systems improve efficiency by improving the monitoring of
inventory and inventory movements. For example, WMS can be used to optimise the use of
available storage space within a warehouse.
Solutions and Feedback: Chapter 11

Q12 Classifying organisations – suggested points for an answer

Chapter 11 is concerned entirely with economic and industrial classifications of businesses. This
question asks students to consider the relevance of these classifications from the perspective of the
procurement function.

The suggested points given here are in note form only. Alternative or additional points might be
equally valid for an answer to the question. Points that might be discussed are as follows.

(a) Economic classifications: public sector, private sector, not-for-profit sector

 The objectives of the procurement function differ according to whether an organisation is in

the public sector, private sector or not-for-profit sector. In the public sector, the objective of
procurement should be to support the organisation in creating value for intended
beneficiaries (the public as a whole or sectors of the public). The objective may be expressed
as maximising added value within the constraints of budget spending limits.
 In the private sector, the procurement function should support the organisation in achieving
its objectives, which can be expressed in terms of profitability, shareholder value or business
growth. As in the public sector, an aim should be to keep purchase prices to a reasonable
minimum, but this is for the purpose of increasing profit.
 In the not-for-profit sector, the overall objective of an organisation is to deliver value to
beneficiaries, and to maximise value within the context of available revenues. Unlike the
private sector where a budget imposes a limit on spending, organisations such as charities
can seek to increase revenues (eg through charity donations).
 Budgeting for procurement and materials purchases also differs according to the type of
organisation. Public sector organisations are accountable to a government supervisory body
for their spending, and for keeping actual spending within budget and avoiding wasteful
spending. In the private sector, the procurement function is accountable to senior
management for performance, often within a system of budgetary control which reports on
material price variances. In the not-for-profit sector, there should be accountability for
spending performance to senior officials and an oversight body for the organisation.
 Procurement is affected by laws and regulations, which differ to some extent according to
the type of organisation. Although regulations differ between countries, organisations in the
public sector are often required to comply with procurement regulations, such as advertising
procurement contracts, the need for open competitive bidding on contracts above a certain
value, and transparency in the competitive bidding process. In the private sector,
procurement is subject to laws and regulations on matters such as product safety and health
and safety generally but these also apply to the public sector organisations. Companies
decide their own procedures for procurement and are not subject to the same types of
regulation as in the public sector. In the not-for-profit sector, some organisations are
subject to regulations about procurement procedures and there is likely to be greater public
awareness of spending decisions than in the commercial private sector.
(b)

Industry sector classifications

 Industry sector classifications have relevance for procurement because supply chains differ
between industrial sectors. This can be explained by means of contrasting examples.
 In the agricultural sector, output consists of commodity products which are sold mainly to
specialist commodity buyers or through derivatives markets. However, supply quantities are
uncertain (due to variable harvests) and prices for output can be highly volatile.
 In the manufacturing sector, many firms are buyers of commodities (food commodities and
mined metals). Manufacturers are usually in the middle of a supply chain between
commodity producers and end-consumer and most of their business transactions are
business-to-business (B2B).
 In the retail sector, most transactions are business-to-consumer, and a major problem in
supply chain management is matching supply with demand as closely as possible, and
avoiding the costs of over-supply (of goods that cannot be sold).
 In the energy sector, supply chain management faces the challenge of conversion from
carbon-based energy sources to clean renewable sources of energy.
 In the service sector, most firms purchase relatively small quantities of direct materials and
subcontracting within the supply chain may be more significant than in other sectors.
 Each sector has its different regulatory requirements, such as building regulations in the
construction sector.
Solutions and Feedback: Chapter 12

Q13 Public sector regulation – suggested points for an answer

Suggested points for an answer

This question covers the entire contents of Chapter 12. Students should demonstrate their
awareness and understanding of regulations for procurement in the public sector.

The suggested points given here are in note form only. They are stated briefly. Alternative or
additional points might be equally valid for an answer to the question. Points that might be
discussed are as follows.

(a)

 Public sector organisations are accountable, through a government supervisory body or the
Parliament, to the general public for what they have done. Accountability includes having to
justify spending, and the value obtained from the spending of public funds. This is not a
requirement for companies in the private sector.
 It is recognised in many countries that there should be transparency in public sector
procurement, and that the public should be given access to information about how much
has been spent and how spending decisions have been made. Transparency in procurement
decisions is often a regulatory requirement for public sector organisations.
 Many public sector organisations, including government departments, spend large amounts
of money. It is therefore appropriate that procedures for spending money, and authorising
the spending of money, should be subject to procedural regulations.
 In all organisations there should be monitoring and control of spending. In the public sector,
spending is regulated by the imposition of budget limits on spending, and comparisons of
actual spending with budget.

(b)

 Certain laws may apply to the public sector but not to the private sector. A notable example
is bribery of government officials, which is a crime in countries such as the UK.
 There may be formal procurement regulations for organisations in the public sector that set
out regulatory procedures for competitive tendering, the method of competitive bidding,
open tenders, advertising major contracts, transparency and disclosures, and times to allow
for the submission of quotations and tenders, and so on. These do not exist in the private
sector.
 Laws and regulations about procurement may apply generally to all organisations, in the
public, private and not-for-profit sectors, such as laws on product safety.
 Some regulations on procurement may be imposed generally by political decision, such as
regulations for import duties and import quotas.

Solutions and Feedback: Chapter 13

Question 14: Branding – suggested points for an answer

This question deals with the importance and role of branding, which is the final item listed in the
syllabus for this subject. The points to include in an answer are largely inter-connected, and although
there may not be many points to make, they should be presented clearly, with full explanations or
commentary.

The suggested points given here are in note form only. Alternative or additional points might be
equally valid for an answer to the question. Points that might be discussed are as follows.

 Branding adds value to a product (or service). The price that consumers are willing to pay for
a product depends largely on the value they get from using the product (use value), but also
from their perceptions of the esteem associated with ownership of a branded product.
Consumers will pay more for a product with an ‘expensive’ brand name, because it can add
to perceptions of social status.
 However, companies use a combination of product features and brand name (use value and
esteem value) to position their products in the market. Just as there are expensive brands,
so too are there ‘cheap’ brands, where the manufacturer pursues a low-cost low-price
strategy. Branding therefore has a role in the differentiation between similar products, for
example motor cars.
 For procurement, it is important that the costs of purchased materials or services should be
consistent with the brand image and product price. There is a connection between brand
and product quality, and between product quality and cost.
 Provided that product quality matches the brand image, branding can give a company a
competitive advantage over its competitors.
 Companies that produce branded products should want consistency of quality in the items
they produce, and in their entire branded product range. As a consequence, companies may
seek to establish long-term business relationships with key suppliers, as a way of helping to
ensure consistency in materials quality.
 Brand image may also affect distribution strategy in the supply chain. In particular,
companies producing ‘expensive brand’ goods may not want to use the same distribution
channels and outlets as those used by manufacturers of cheaper branded goods.
 Branding is usually important only for consumer products. Buyers of non-consumer products
and commercial buyers of consumer products are much more likely to focus on cost and
other aspects of procurement such as quality and order cycle times. Commercial buyers do
not see value in buying branded products and so, as a general rule, are unwilling to pay for
‘esteem’