CIPS Exam Report for Learner Community:

Qualification: Diploma in procurement and supply

Unit: D3 - Sourcing in P&S
Exam series: November 2014
Question 1 – Learning Outcome 1.01

a) Describe the potential interests of TWO stakeholder groups of the national government's (4 marks)
procurement function.
b) Describe FOUR possible approaches to involving stakeholders in the national (16 marks)
government's sourcing process.
a) The aim of the question was test the candidates’ ability to identify various stakeholder groups in
government and their various interests in the sourcing process. The answer content might include any two of
the following (inter alia):
 Taxpayers –they want to ensure that their funds are spent well to achieve value for money.
 end users-(e.g. patients, students, etc) want to ensure that they receive the highest level of service
 government ministers/departmental officers – they will pursue the value for money objective
 suppliers-seek fair treatment and reasonable prices for the goods and services they provide
 internal customers –(e.g. finance) expect efficient service from the procurement function
 Procurement staff (500 strong) – expect fair rates of pay and working conditions.
1 mark was allocated for the correct identification and additional 1 mark for a brief description of the interest
of each of two stakeholders. This was a brief question in which most candidates gained full marks.

b) The question tested the candidates’ knowledge of the various approaches to involving stakeholders in the
sourcing process. The answer content might adopt methods suggested by Dobler and Burt:
 Early Buyer Involvement: recognises the expertise/ knowledge of the purchasing function as a key
foundational input in project work and in product/ service development.
 Formal committee approach: Specifications may be developed by a committee represented by
design, operations, finance, quality, procurement, etc. –to reconcile conflicting objectives of each.
 Informal approach: All departments are urged to consider both commercial and operational factors in
their decision making. Buyers are required to challenge user requests and to suggest alternatives.
 Purchasing co-ordinator approach: This is a formalisation of the informal approach, with
procurement staff designated as liaison officers to co-ordinate the interactions/consultations.
 Early supplier involvement: recognises the expertise/ knowledge of the suppliers as a key input in
project work and in product/ service development.
Some answers provided other acceptable types of team approaches to engaging stakeholders:
 Multi-functional or multi-disciplinary teams: procurement may form project teams drawing
members from different functions/departments to pool and share various competencies/interests
 Multi-skilled teams: teams formed bringing together functionally versatile individuals who can
engage in multiple tasks with other stakeholders- spec development, prequalifying, negotiating,
contracting, appraising, etc.

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  Project teams/task forces: procurement may form or be involved in short term cross-functional
teams (members seconded from various departments) for a particular purpose and thereafter
disbanded.
 Virtual teams: a project team may be remotely interconnected interacting via ICT tools such as email,
webinar, tele-conferencing, video conferencing, etc.
Other answers presented and discussed such approaches as - the use of focus groups; use of questionnaires;
informal/formal discussions.

2 marks were allocated for the identification and brief description of each of four approaches to involving
stakeholders in the sourcing process. The additional 2 marks in each case were allocated for depth and
application.
Most candidates identified the required four approaches to engaging stakeholders. Stronger answers
provided depth and application to the case study. Poorer answers misinterpreted the question and presented
the advantages of engaging the stakeholders while others discussed such irrelevancy as sourcing options
(sole, single, or multiple sourcing) and stages in the sourcing process.
Question 2 – Learning Outcome 2

Petra aims to develop a standard sourcing process. One element of this will be to use
selection criteria to identify appropriate external suppliers.
Explain FIVE selection criteria that Petra might use to identify appropriate external
suppliers. (20 marks)
The aim of the question was to test the candidates’ knowledge of the supplier selection criteria applied when
sourcing requirements from external suppliers. Answers were expected to include such content as:
 Financial capabilities: Petra should obtain and analyse financial statements to ascertain the potential
supplier’s profitability, liquidity/solvency, cash flow, business attractiveness to investors, etc. The
purpose is to ensure that the supplier is financially stable enough to fulfil the contract without failure
in delivery, quality, etc. This would be particularly important for Petra, given that a supplier of
cleaning services had gone out of business during the first year of a contract
 Technical capability: Petra will determine whether the potential supplier has the technology
(equipment and knowhow) to produce the requirements (inputs or services) – i.e. the supplier already
produces, or has the capability to produce the requirements. It would also include the consideration
of the supplier's operational capabilities in areas such as innovation, design, just-in-time supply and
design flexibility (late customisation/redesigning).
 Production capacity: determine whether the supplier has the actual production or operational
capacity (machines, staff, logistics and other relevant resources) to effectively handle the volume of
business Petra intends to give. It would involve the consideration of current committed/uncommitted
production capacity, lead times, etc, and potential for future increase.
 Systems capabilities: whether the supplier's systems and procedures are compatible with those of
the national government, or its ability and willingness to adapt to them. It might involve considering
such aspects as the supplier's state of IT development and the potential for integrating with Petra’s.
 Quality and quality assurance: whether supplier has the ability to conform to the national
government's specifications. Petra will also consider whether the supplier has robust quality systems
and procedures for defect detection/correction (QC) and prevention (QA). Other aspects might
include existence of accredited quality management system (QMS) such as ISO 9000 and a quality
culture such as TQM.
 Environmental and sustainability: Petra will scrutinise existence of policies on sustainable resource

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 consumption and environmental protection. It should have a culture that promotes ‘greener’
environment (through design and innovation, greener materials and packaging, reduced waste,
energy efficiency, recycling, reverse logistics, minimised landfill, reduced carbon footprint etc). The
supplier may also be required to have relevant accreditation such as ISO 14001.
 CSR, ethical and labour standards: Petra will consider whether the supplier is a responsible citizen
through existence of robust polices covering CSR , ethical conduct and compliance to ILO standards.
The supplier will show commitment to transparency and good governance both internally and in its
entire supply chain - through practices that promote health and safety; worker rights, equality,
diversity, ethical/fair trading, local community interests, etc. The national government has strong
policies on such issues as they affect the supplier’s image and ultimately the public interest which
Petra must manage.
The last two criteria above could be broken down and presented variously (e.g. Environmental; Ethical; CSR;
etc) and answers rewarded appropriately.
 Other selection criteria might include – the supplier's organisation culture such as shared values,
beliefs, attitudes toward such matters as innovation, ethics, customer service, etc that are congruent
with those of the national government; price/cost factors such as the supplier’s costing methods, cost
reduction initiatives, discount/payment terms, and Petra’s total acquisition/ownership costs).
Some candidates might provide different approaches based on such concepts as – Ray Carter’s 10Cs;
FACE2FACE; etc; which will be rewarded according to presentation, depth and application.

Up to 2 marks were allocated for each of the five selection criteria identified and briefly explained, and
additional 2 marks for a more in-depth explanation in the context of the case study.
This question was very well answered with most candidates gaining credit or above marks. Weaker answers
were either superficial or poorly structured, e.g. lacking clear points/paragraphs, or presented in numerous
sketchy bullet points. Poorer answers presented irrelevant content covering market structure or sourcing
options such as make/buy, single/multiple sourcing, Kraljic matrix, monopoly/oligopoly, Porter’s 5 forces, etc.
Question 3 – Learning Outcome 3.3
a) In the context of financial accounts, explain how the following ratios are calculated and
how they are interpreted. (8 marks)
(i) The current ratio.
(ii) The acid test ratio.
b) Based on the financial data in the case, evaluate the three potential facilities (12 marks)
management suppliers and explain which of the three should be selected for the contract.
a) The question tested the candidate’s knowledge of the financial/liquidity ratios applied to assess potential
suppliers’ financial stability when making supplier selection decisions

(i) The current ratio is calculated by dividing current assets by current liabilities. The answers should
further describe current assets as typically comprising stock, debtors and cash, while current liabilities include
creditors and short term bank loans.
Answers should also add that a company's current ratio should be 1:1 or better (ideally 2:1), as this indicates a
viable supplier with sufficient current assets to settle its current liabilities without a threat of winding up.

(ii) The acid test ratio is calculated by dividing current assets (minus stock) by current liabilities. The
answers should explain that stock is excluded because it may be difficult to realise (turn into cash) quickly, or
it may not be realised at its full balance sheet value.
The answers should also add that acid test ratio should ideally be 1:1 (or better) to provide an assurance that
a company is in a strong financial position from a liquidity viewpoint.

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Up to 2 marks were allocated for an explanation of the calculation of each of the current ratio and the acid
test ratio and additional 2 marks for interpretation. Most candidates demonstrated knowledge of the
formulas but there was a wide variation in the ability to explain and interpret the ratios. Whereas many
candidates received credit or above marks, weaker candidates clearly displayed a knowledge gap e.g. using
such words as ‘assets or liabilities’ and ‘total assets or liabilities’ in the place of ‘current assets or liabilities’.

b) The question aimed to test candidates’ ability to understand and evaluate/interpret financial stability of
potential suppliers using financial ratios.
Current ratio Acid test ratio Return on Capital
Employed
Simpson FM Ltd 0.8:1 0.5:1 22.6%

Cartwright FM PLC 1.0:1 0.7:1 17.4%

Morgan FM Ltd 1.7:1 1.3:1 12.9%

Simpson FM Ltd has low current and acid test ratios, suggesting potential inability to settle its current
liabilities from its current assets. Given that a supplier that won a cleaning contract went out of business in
the first year, this would be a concern to Petra. It does, however, have a healthy return on capital employed
(ROCE), showing that it is a profitable company.

Cartwright FM PLC has a current ratio which is just adequate at 1.0:1, but an acid test ratio that is below the
required level. Its profitability is good with a ROCE of 17.4%.

Morgan FM Ltd has the best liquidity ratios. The current ratio of 1.7:1 and an acid test ratio of 1.3:1 indicate
that it can easily settle its current liabilities from its current assets, even if stock is not taken into account. It
does, however, have the lowest comparative profitability with the ROCE of 12.9%.

Selection: Given the above experience of the supplier who won the cleaning contract, but went out of
business, the safest option for Petra would be to select Morgan FM Ltd despite the relatively low profit. Petra
may need to establish whether the very high ratios could be due to poor management of working capital.
A choice of Cartwright FM PLC could also be justified, in terms of an adequate current ratio and a higher
profitability percentage.

Up to 6 marks were allocated for financial evaluation of the three potential suppliers based on the provided
financial ratios, and additional 6 marks for the conclusions reached as to which supplier should be selected.
The question was generally well answered. Stronger included an indication that the given financial ratios are
subject to causal factors and therefore do not provide the whole spectrum of review for a potential supplier.
Weak answers were attributed to a clear lack of candidate preparedness for this particular learning outcome –
some of which even selected the most unlikely supplier, Simpson FM Ltd.
Question 4 – Learning Outcome 4
Describe FIVE benefits for procurement if Petra developed the use of electronic systems to
help the sourcing process. (20 marks)
The aim of the question was to test the candidates’ knowledge of the electronic systems applied in the
sourcing process, with a focus on their benefits. The answers were expected to have the following (or similar)
content: -
 Reduced cycle times in the sourcing process as buyers can communicate with suppliers at increased

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 speed – faster processing of information and feedback.
 Cost savings through increased process efficiencies, reduced prices and better quality due to
competition enhancing tools like e-auctions. Paperless systems will reduce costs of stationery, filing
space, and adverse environmental impacts.
 Wider supplier base locally and globally due to the power of the internet and greater capacity for
data management - Petra will have a wider range of suppliers to choose from.
 24/7 access on the internet will be unlimited by large geographical distances and international time
zones thus providing opportunity for Petra to maintain communication across different office hours.
 The development of best practice providing arising from better communication, consistency,
accuracy, transparency, audit trail and accountability. It can enable uncompromisable devolution of
clerical sourcing processes to users, freeing buyers to focus on specialist tasks.
Some candidates could break down any of the above benefits (e.g. cost savings, best practice) into several
points and appropriately explain them in detail.

Up to 4 marks were allocated for correct descriptions of each of five benefits of electronic systems for
procurement, with higher marks for more in-depth descriptions and application. This was probably the most
popular question of the exam as most candidates gained distinction level marks. Poorer answers tended to
misinterpret the question and present the various types/tools of e-systems.
Question 5 – Learning Outcome 5 (if applicable)
Explain FIVE differences in either legislative, regulatory or organisational requirements that
Petra may encounter in her new role in public sector procurement, compared to her
previous role in private sector procurement. (20 marks)
The aim of the question was to test the candidates’ understanding of the main legislative, regulatory and
organisational requirements when sourcing in the public and private sectors.

The differences between public sector procurement and private sector procurement may vary between
jurisdictions or contexts –e.g. from country/organisation to another. These differences more in terms of
degree of emphasis than of basic operational procedure. They might include the following:

 the objective of the procurement function in the private sector will be to reduce costs and increase
profits, whereas in the public sector it aims to achieve value for money and defined service levels

 in the private sector, the procurement function is responsible to the directors and shareholders of the
company, whereas in the public sector, it will be responsible to taxpayers and the general public

 the legal restrictions facing the procurement function will differ; for the private sector its activities
will be restricted by company law, employment law and product liability law, but in the public sector
there will be additional restrictions such as EU or other procurement directives

 in the private sector procurement there will be confidentiality in supplier/buyer dealings, but in
public sector procurement confidentiality is limited because of the public interest. This principle will
also apply in dealings between different organisations/functions in terms of information exchange
within the public or private sectors.

 the procurement function in the public sector is constrained by externally imposed spending limits,
through budget thresholds; in the private sector, there are fewer constraints and funding can be
found for attractive commercial projects that may emerge

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  in the private sector, procurement functions are much more likely to establish longer term
relationships with suppliers, to support the supply/value chain; in the public sector, relationships with
suppliers are more likely to be short term because of compulsory competitive tendering and the need
for cost minimisation

 sourcing will tend to be quicker in the private sector as the procurement function is bound by fewer
regulations; in the public sector, bureaucracy arising from set procedures and strict regulations will
make the process slower.

 Diversity of items in the private sector will be limited to the special requirements for a defined
product/service portfolio; the public service sector has a much wide diversity for items or resources
required to provide diverse services.

1 mark was allocated for the correct identification and up to 3 additional marks for an explanation of each of
the five differences. This was one of the unpopular questions as most candidates gained credit level or below
marks with most answers tending to be lopsided toward public sector features. Stronger answers discussed
both sectors whereas poor answers misinterpreted the question and presented requirements for
international sourcing, or types of tendering (open, restricted, negotiated).