Practice Free L4M8 Procurement and Supply in Practice Exam Questions Answers With Explanation

If a supplier is accredited or is a member of an association that promotes good ethical conduct, a statement to this effect is likely to be featured on its company documentation. This could be in a form of letters after the organization name or the authorized use of logo.

Accreditation information should be verified by procurement professionals either asking organiza-tion for certification to prove membership or accreditation or checking on a professional register.

Below are associated bodies that form some industries.

1. ISO 14001 – for quality management

2. CIPS – for procurement and Supply

3. Red Tractor – NGO Registered in the UK, promoting human right

4. Amnesty International – human right

5. Carbon Trust – For Carbon neutral status.

Trying to measure how sustainable an organization was use to be challenging undertaking. However, during the 1990s, a concept brought up by American John Elkington change the way sustainability was measured. This framework is known as the triple bottom line (TBL) and measures sustainability in relation to organizational performance and investment against the 3Ps (1) Profits (2) People (3) Planet. For example;

Profit: A packaging manufacturer reinvesting its profits in State- of-the-art recycling machinery for it wasted cardboard.

People: A large privately owned call centre donate its end of life computers to a local youth clubs and social groups to help gain internet cases.

Planet: A driving instructors using only hybrid vehicles to teach her learners, thus to reducing Co2 emission.

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Key performance Indicators (KPIs) and service level Agreement (SLA) are measures that demon-strate the effectiveness of a supplier. By using KPIs and SLAs as part of suppliers management, procurement professionals can monitor and evaluate performance and identify areas that need attention or improvement. KPIs and SLAs are used for product and service contract respectively.

Two KPI

1) Number of defects: Not more than two defects is allowed on the generator and its accessories

2) Supplier Lead Time: Delivery after placing order should not be anytime longer than 14 days.

Two SLAs

1) The toilet should be washed with soap, and deodorant should be sprayed twice a day

2) Bathroom and toilet should not be allowed to smell out to the passage. Bathroom smelling out to the passage twice a month is a violation of the contract.

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When a fixed asset reaches the end of its life, it requires decommissioning before reconditioning or disposal.

Decommissioning is to observe all the safety measures and technical procedures and stop active machinery or an asset from operation (example; gas plant, power generator, transformer etc.

Decommissioning process include the following aspect

1) Preparation: Plan the process

2) Dismantle: Take the asset apart and remove hazardous waste

3) Processing: make safe any hazardous waste

4) Disposal: Ensure paper work is received to confirm removal and disposal

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Though strong due diligence procurement professionals can assess which suppliers or potential suppliers appear to meet the criteria associated with ethical practice.

Prior to the contract being awarded, strong due diligence can save the organization from the following cost:

1) Cost of reputation

2) Environmental damage

3) Stakeholders dissatisfaction,

4) poor quality and rework

5) Breach of contract

6) Ethical concerns

During the sourcing stage of the procurement cycle, the procurement professional needs to identify and select suppliers to fulfill the business needs. Supplier selection involves evaluating suppliers against predetermine criteria to assess their suitability in working with the buying organization. Suppliers can be evaluated according to Carter’s 10Cs which are as follows: (1) Competency (2) capacity (3) consistency (4) control (5) cost (6) commitment (7) cash (8) Clean (9) culture (10) communication.

Procurement professionals can decide to evaluate and select suppliers based on the overall strategy and the business objectives. After that, it most suitable suppliers receive the documentation (Invitation to tender/ request for quotation).

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When organization has made the decision about which option is best for sourcing the asset, it can then begin to work on the whole life asset management strategy.

Whole life asset management is the process of evaluating the total price and all associated costs of a product to make an informed decision as to which option will provide the organization with the best value for money. This strategy is only under taken for large-value procurements because; 1) It takes considerable time (2) It involves many stakeholders and require numerous resources; If whole life asset management were conducted on every purchase it would not create value for the organization and that may tie up valuable resources.

Human rights are the statutory ways in which individual expects to and should be treated. Ethical and responsible sourcing includes the protection of human rights, not violating it.

When young women are being bound into contracts where they work for two to three years, they are not being granted the right to freedom from slavery.

Forcing these women to live in hostels under restrictions that prevent them from moving and are denied the opportunity to improve on their living condition is a violation of their right to life, liberty and personal security, also, their freedom from torture and degrading treatment is being violated.

When reviewing supplier’s response the procurement professional should consider the right quantity of product or service that has to be ordered at anytime as against the price to decide how to gain the best cost.

Factors to consider include the following

(1)Cost of inventory

(2) cost of insurance

(3) cost of transportation.

These three should be considered against price.

Note: Incoterms are versatile and procurement professionals should understand how they are ap-plied and what point the risk transfers from being the supplier’s responsibility to being the buyer’s responsibility. It is important to consult the ICC for the most recent definitions, but in the following questions (101-111) you can understand the rules.

Note: sharpen your knowledge on INCOTERMS. Please consider the following Objective Re-sponse questions

Bribery is the act of giving someone something of value to persuade them to do something that benefits you. Ethical and responsible sourcing requires conducting due diligence on bribery before going into contractual relationship because failure to this might lead to loss in reputation.

In other for an organization to defend itself against a case of suspected bribery, the United Kingdom bribery Act introduced in 2010 suggests that organizations should have adequate procedures’ in place.

The following are six procedures an organization should have in place to be able to defend itself against bribery

1) Proportionate procedure

2) Top level commitment

3) risk assessment

4) due diligence

5) communication

6) monitoring and reviewing

A new buy is the purchase of goods and services by an organization or an individual for its first time. For example a transport organization for the very first time contracting the purchase of a Lorry out to an external supplier. In situations like this, it is advisable to start the procurement cycle from the very first stage. Which is understanding the need and developing high level specification.

Modified re-buy is the purchase of goods or services that an organization has bought before there was a need but with changes to the specification or supplier or quantity or quality. In carrying out modified re-buy, procurement professional should start from the very first stage of the procurement cycle to justify the added need and follow through. Not in all cases that buyer would have to start from understanding the need. In a situation where the changes required is a change of supplier, the organization will start from its preferred suppliers list and contract the next ranking supplier as the case may be.

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The social impact of an organization is formed by various behaviors. If an organization; behavior is poor this will create social impact which is likely to be reflected in the business performance. Organizations which display poor behavior face outcomes such as the following.

1. Reduce brand loyalty

2. Difficulty in recruiting

3. Negative media coverage

4. Reduced sales/profit

5. reputation damage

Conflict or dispute is the final area a procurement professional considers when creating terms for a contract with a supplier. If conflict or dispute arises, there must be a process put in place in the contract to try to resolve it and these includes;

a) Negotiation, b) mediation, c) arbitration and d) litigation.

Negotiation is usually carried out between senior people within organization that are in conflict, if they cannot reach an agreement through negotiation, mediation is the next stage, mediation is when a third party tries to help find a resolution among the parties in dispute. If mediation fails arbitration can start, arbitration involve independent professionals (arbitrators) working with all the party to try to reach an agreement. Parties do not have a formal or legal obligation to follow the arbitrator’s recommendation. Arbitration is expensive. If arbitration fails to resolve the conflict, the final stage is litigation, litigation takes time and money, and most people avoid it. It is a legal process where a court decides on the outcome of the dispute. The judge’s ruling is final.

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In the decision to not run out of supplies, organizations can anticipate a peak were by it products will be in a high demand or a period of scarcity of raw materials and may want to increase the in-ventory. However, if this forecast is not accurate, it may lead the organization to holding excess inventory. This can expose the organization to some negative factors.

Acquisition Cost: The organization will incur an acquisition cost for the excess inventory which is inclusive of the cost of placing the order and the cost of purchasing the goods.

Holding Cost: The organization will spend more money holding the stock, trying to keep it in good condition by providing the required light, temperature, skilled handlers and so on.

Working Capital not adding value: This will off shoot the holding cost. Also valuable working capital in excess stock which in the time not adding value, can affect the liquidity of the business. This is also an opportunity cost and increase solvency.

Organizations which display good behavior create a positive social impact. The com-munity in which they are based and to which they supply will benefit from the following.

1. High employment

2. Fair wages

3. low pollution

4. sustainable resources

5. Engagement and movement with local organization

Tangible costs are the cost an organization incur acquiring items that can be physically touched and or seen. Examples includes; 1) Capital Purchase 2) Raw materials 3) Sundry items 4) Vehi-cles/transport 5) Utilities

Intangible costs are the cost an organization incurs acquiring something that cannot be physically seen or touched. Examples include; 1) Insurance 2) Marketing 3) Research and development 4) Salaries and/pension 5) Services 6) Training.

Direct costs – These are costs that an organization incurs acquiring product and services directly attributable/traceable to its production, for example, the cost of labour and materials directly uses to produce the goods/services which the organization sells. In the case of buying and running a Lorry for transport fleet, this would be 1) total cost of acquiring the lorry,) Tooling 3) Operation.

Indirect cost - These are costs that are not directly associated to production, for example, materials and services not used in production, labour/ staff cost not directly attributed to production, such as management, sales and marking, ICT support, rents. In the case of buying and running a Lorry for transport fleet. Examples are; 1) Insurance 2) Disposal.

Commissioning is bringing something new into working condition, e.g start running a gas plant after building it. Commissioning is one of the eight elements that form the cycle of whole life asset management. The commissioning of an asset has the following associated costs, installation, training insurance, testing, operational efficiencies/performance and quality.

The social impact of an organization is formed by various behaviors. If an organization; behavior is poor this will create social impact which is likely to be reflected in the business performance. Organizations which display poor behavior face outcomes such as the following.

1. Reduce brand loyalty

2. Difficulty in recruiting

3. Negative media coverage

4. Reduced sales/profit

5. reputation damage

Commissioning is bringing something new into working condition, e.g start running a gas plant after building it. Commissioning is one of the eight elements that form the cycle of whole life asset management. The commissioning of an asset has the following associated costs, installation, training insurance, testing, operational efficiencies/performance and quality.

Corporate Social responsibility (CSR) policies state how organizations aim to contribute towards the community and how an organization portrays itself towards social impacts.

Ones the need is understood, the procurement professional develops the specifications while working together with stakeholders and colleagues to ensure that the final design is fit for purposes that it meets the generated need.

Specification can be focus on performance or conformance.

Performance specification states what the product or service must do or how it should perform but leave the supplier the freedom to achieve this, however they wish.

Performance specification brings the following advantages; it allows supplier innovation, promote competition in the market place, shorter document, quick to prepare. The disadvantage of perfor-mance specification is that buyers may not know exactly what they will be getting.

Conformance specification gives clear instructions to the supplier about what is required and how it should be achieved. Examples of conformance specifications are chemical formulae, recipes and technical drawings. Conformance specification specifies which standards a requirement must meet or exceed. The advantage of using it is; buyers know exactly what they will get. It has the following disadvantages; the buyer bears the risk, it does not encourage supplier to innovate, take longer and complex documentation.

Tuckman’s team development model depicts from where a team is formed to the various stages they might experience before the end where the objective is achieved and these includes.

1) Forming: here they are just being put together

2) Storming: conflict and competition begin to arise

3) Norming: here agreement and consensus is reached as roles and responsibility is clear.

4) Perform: They start carrying out the roles and responsibility

5) Adjourning: Task is complete and they are discharged

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Benchmarking is the process of comparing a function, process or performance with another which is best-in-class. Benchmarking is either internal or external. External benchmarking has three types;

1) Competition benchmarking,

2) Functional

3) Generic

Company Toyota with the Porsche a competition in the same industry and by suggesting that drives will find the cars performances comparable with that of Porsche Cayman sports car, suggest think it is an external competitive benchmark.

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Continuous improvement relates to removing waste from the supply chain and improving processes to increase efficiency within whole life asset management in a full power project (a flour producing firm) can benefit from continuous improvement in the following ways;

1) Reduce cost of spears by recondition parts, instead of disposing them out rightly.

2) Can reduce down time by conducting routine maintenance after hours.

3) Can reducing accident by up skilling operators on safety

4) Can reduce waste oil by following owner’s manual instead of relying on experience.

5) Create efficiencies by operating a 24/7 shift pattern.

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When the procurement professional is setting key performance indicator (KPI) where which the supplier performance will be monitored and managed. The KPI is expected to be SMART. SMART is an acronym that is used to set KPI and specification.

S - specific ,

M - measurable,

A - achievable,

R - relevant, and

T - timebound.

Whole life asset management is the process of evaluating the total price and all associated costs of a product to make an informed decision as to which option will provide the organization with the best value for money option: To achieve this the organization works at the following eight elements.

1. Identify need/objectives/risk: The first stage of the whole life asset management is the same as the first stage in the CIPS procurement and supply cycle: identify the need prior to any asset being procured; the need could be competition in the marketplace, raised/reduced demands or financial concern. Once this need has been identified, the objectives of the new assets need to be set, and this may include being more energy efficient, reducing cost or saving money.

Risk also needs to be explored. When investing in a new asset there are factors to be considered that may or may not be advantageous to the investment. These include; downtime, lost sale/revenue or associated cost.

2. Procurement: Procurement professional would have to source and arrange supply of the asset.

3. Construction: ones the supply has being arranged, then the designing and the manufacturing of the asset begins.

4. Commissioning

5. Deterioration/maintenance

6. Condition performance monitoring

7. Decommissioning

8. Renewal/replacement

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Organizations which display good behavior create a positive social impact. The community in which they are based and to which they supply will benefit from the following.

1. High employment

2. Fair wages

3. low pollution

4. sustainable resources

5. Engagement and movement with local organization

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A weighted score card is a tool with a systematic and a fair process for selecting supplier, based on predetermined criteria. This tool can help make the decision by presenting a fair display of how all suppliers did in the process. The values of these weights are based on their importance. The supplier with the highest score card is considered the most suitable to be awarded the contract.

In the table above, cost is considered more than all other criteria. Contract length is the lowest which is weighted 2

Base on the weighted score card as presented above, company B scored 78 while company A and company C scored 65 and 63 respectively.

Company A, having scored the highest (78) should be awarded the contract.

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Make or buy decision are about whether a products or services should be made within the organization or bought-in from an external supplier.

For a procurement professional to establish which method (make or buy) offers the best value, the item in question must be thought through if it is core to the organization and which option will add more value to the organization, as regards achieving its strategic goals. If it is core the procurement professional decide to make it and if it is not core the product or services can be bought in.

ILO stands for International Labour Organization- It is a United Nations agency whose mandate is to advance justice and promote decent work by setting international labor standard.

ETI is Ethical Trading Initiative: It is a leading alliance of companies, trade unions and NGOs that promote respect for workers right around the globe. Its vision is a world where all workers are free from exploitation and discrimination and enjoys condition of freedom, security and equity.

Carter’s 10cs is a detailed mechanism that procurement professional uses to evaluate potential supplier. What the procurement professional should consider in supplier are the following 10 things.

1) Competency 2) capacity 3) Cost 4) Cash 5) Clean 6) Consistency 7) Control 8) Culture 9) Com-mitment 10) Communication.

Trade war is an economic conflict where countries make it difficult for global trading to happen. Trade wars can make importing products to a country very expensive. A recent example is the US-China trade war; prices were raised on us-built vehicles exported to China. This affected consumer the most as there was an upshot of price.

A new buy is the purchase of goods and services by an organization or an individual for its first time. For example a transport organization for the very first time contracting the purchase of a Lorry out to an external supplier. In situations like this, it is advisable to start the procurement cycle from the very first stage. Which is understanding the need and developing high level specification.

Modified re-buy is the purchase of goods or services that an organization has bought before there was a need but with changes to the specification or supplier or quantity or quality. In carrying out modified re-buy, procurement professional should start from the very first stage of the procurement cycle to justify the added need and follow through. Not in all cases that buyer would have to start from understanding the need. In a situation where the changes required is a change of supplier, the organization will start from its preferred suppliers list and contract the next ranking supplier as the case may be.

By using STEEPLE and SWOT analysis, the organization can reach out to the following strategic decision in how it will engage with its external environment, and utilize it strength to cover up for its weakness and achieve its strategic goals;

1) STEEPLE can aid an organization to come up with informed decision by understanding when is the right time to procure goods or services?

2) STEEPLE and SWOT analysis can uncover the quantity that could be most economical to ac-quire at the point in time.

3) When an organization want to decide on the currency that could be most favorable for the buy, it will analyze the countries involved and the strength of their currency and make its decisions on which currency that the supplier should be paid that will not make the organization to lose unnecessary money to exchange.

4) Should the product or services be made or bought?

5) Should the product or services be resourced?

6) Should the product or services be placed?

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A sector is an area of an industry, e.g., private, public or third sector.

A public sector is a sector of the economy that is owned, finance and run by the government. This sector is financed with tax payer’s money. And therefore owe the general public an ethical explanation towards all investment and decision.

Once the supplier that is awarded the contract has accepted, the buyer can tell the unsuccessful bidders. This usually happens through email or letter. The public sector is more likely to give feedback to unsuccessful bidders and also have to respond to any stakeholders that request information on why a supplier is not successful.

Topics that are covered within ethics are;

1. Environmental factors

2. The triple bottom line: profit, people and planet

3. Adopting sustainable practice.

4. considering the social impact of organization’s behaviors

When an organization want to purchase an asset, it considers the depreciation and deterioration in the whole life of the asset and how it will be manage.

Depreciation is the reduction in value of a tangible and a fixed asset over time. The purpose of calculating the depreciation of the asset is to give the organization a fair and current view of what the asset is worth at a particular time. Depreciation is a way of converting the cost of an asset into an expense over a period of time. Depreciation is a permanent feature listed against an asset throughout its life time and it based on wear and tear, reduction in performance and reduction in value.

Deterioration is the process of something becoming lower in quality or performance. The longer the asset can last without deteriorating the better value the asset represents.

Condition performance monitoring is a surveillance system that is designed to get the maximum production uptime and availability out of an asset. And this can be achieved by timely monitoring and measuring of temperature, vibration, output, speed, noise, emissions and quality. With this, decision has to be made as to what, if any, action needs to be taken. The five approaches to condition performance monitoring are as follows:

1. Do nothing: Use like a commodity. This will bring worries later.

2. Reactive: Fix it when it breaks. This will run to failure.

3. Preventive: Scheduled maintenance.

4. Predictive: Fix it before it breaks. Predict faults.

5. Proactive: Continuous improvement defect elimination.

The most cost-effective approach is ‘Proactive’, because is the only approach that has continuous improvement in the process, people and policies to minimize downtime. Being proactive takes defect out of the system and continuously harness opportunity that will optimize the system

When a contract has been awarded, either is to meet tangible needs or intangible needs, contractors or suppliers should be managed to ensure that they are meeting up with fulfilling their contractual agreement. To establish this, there are methods of managing contracts and suppliers.

Service level agreement (SLA) clauses: is placed in contract to ensures that supplier meets the expected and agreed level of service

Key performance indicator (KPI): are used to manage contracts that fulfill tangible needs, the KPIs are set performance thresholds that are used to monitor supplier’s performance.

Management by objectives (MBO): is the process of defining objective that are strategic to the organization relating them to the vision and mission and communicating them to the supplier through the contract and ensuring that this objective is met during contract performance.

Reviews: Regular supplier reviews are good practices, for it gives the buyer opportunity to give feedback on performance.

Continuous Improvement: Contracts and suppliers can be monitored through how they are chang-ing for better incrementally as they are fulfilling the schedule. There must be a set down system to timely improve on the process, people and continuously reduce waste.

Training: It is essential that training, are provided to come up on areas supplier is lacking.

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When evaluating offers, it is important to remember that the best price may not be the lowest. To ascertain that; the total cost of Acquisition TCA (the cost a buyer bears for placing orders and re-ceiving a product from a supplier) should be uncovered and compare against offers received. Things to consider that might make up the total cost of acquisition are;

1) logistics and handling costs

2) Cost of requisition

3) Rework

4) stock cost

5) Delay

6) Inspection

7) customer services

8) consumables

9) Training & support

Stakeholders are individuals or organizations who are directly affected by a decision for example, community, shareholders, employees, suppliers, distributors, customers etc. stakeholders can be internal (employers, staffs), connected (such as suppliers, shareholders, financers and customers) external (Government, pressure groups, and community).

The matrix that helps define how to manage stakeholders is mendelow’s stakeholders manage-ment matrix. This matrix is based on the theory that the level of management stakeholders require depends on the level of their power and interest within the project or organization

The matrix groups stakeholders in to four quadrants according to their power and interest and ad-vice how to manage them.

1) Low power – Low interest (minimum effort)

2) Low power – High interest (keep inform)

3) High power – Low interest (keep satisfied)

4) High power – high interest (manage closely)

The abuse of power within the supply chain can be linked to corruption. If individuals with seniority favor one supplier over another, they can exercise their power to award the contract to whoever they wish. According to CIPS code of conduct, this is not acceptable.

According to French and Raven, there are five types of power (Legitimate power, Reward, Expert, Referent and Coercive), and these powers can most likely be used in corruption.

Data can be primary or secondary

Primary data are derived from original work or research through experience. Primary data can be gathered from the following sources; 1) Interview (2) survey (3) meetings (4) case studies.

Secondary data is derived from a previous source, i.e. somebody else has gathered the data. Secondary data can be gained from; (1) Books (2) Websites, Trade magazines, etc

Contract performance review and continuous improvement is the stage 11 of the CIPS procurement and supply cycle.

In order to effectively manage supplier performance and contractual obligations, the suppliers per-formance against key performance indicators (KPI) should be reviewed regularly. This KPI should have been agreed doing the post contract award negotiation. In addition to review KPIs suppliers and the procurement team should work towards continuous improvement. This is a continuous ef-fort to improve product or services within an organization. This may involve improving quality, reducing waste in the supply chain and focusing on innovation. It is an ongoing process that works toward perfection.

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RESPONSE

After a need in an organization has been identified/understood, defined, justified and authorized, the next stages are to understand how commodity prices are reacting, which suppliers are available and their strength. The make or buy decision can be reached with knowledge from this; the procurement professional can consider the organization external environment, strength, weakness opportunity and threat to develop strategy/plan of how to achieve the procurement.

‘STEEPLE’ is an effective way to evaluate the external environment. It helps buyers to assess factors that could affect the need in hand and helps them to develop the plan accordingly. ‘STEEPLE’ is an acronym which stands for,

Social, Technology, Economic, Environment, Political, Legal, Ethical

‘SWOT’ helps the organization to analyze its strength and within the organization and the oppor-tunity and threats outside the organization.

‘SWOT’ is an acronym which stands for, strength, weakness, opportunity and threats.

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Supply chain involves a network of individuals, organizations, technology activities and resources to make sure goods or services flow along the chain. If one point fails, every part further along the chain fails.

Fullpower projects (a flour manufacturer) supply chain begins with producers (raw materials, wheat farmers), suppliers, manufactures, distributors, retailers and end users (customer).

Fullpower projects supply chain falls within the primary sector (producers of wheat), the secondary sector include the manufacturing (those that converts the wheat the suppliers brings into flour) and tertiary sector (the distributor those that takes the wheat to the end users).

An offer is created when one party communicates to another or to multiple parties that they wish to enter into a legal binding agreement in accordance with the terms stated, for example; a company in promotion advertising for buyers to buy one and get one free, an offer is a buying organization communicating to a supplier to supply X number of goods and be paid x amount upon delivery at company premises, an offer is when a football club proposes to pay X amount to a player if agrees to play for them for a month. An offer can be legally banded if accepted, whereas invitation to treat does not. An invitation to treat is just an invitation from one party to another to begin negotiations with the intention of creating an offer. If an offer is made without stating terms, this becomes an invitation to treat, for example, an invitation to treat is when a pharmacy displays a drug in its shelf. An invitation to treat can be linked to a request a buyer send to suppliers asking them for specific information.

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Commissioning is bringing something new into working condition, e.g start running a gas plant after building it. Commissioning is one of the eight elements that form the cycle of whole life asset management. The commissioning of an asset has the following associated costs, installation, training insurance, testing, operational efficiencies/performance and quality.

Trying to measure how sustainable an organization was use to be challenging undertaking. However, during the 1990s, a concept brought up by American John Elkington change the way sustainability was measured. This framework is known as the triple bottom line (TBL) and measures sustainability in relation to organizational performance and investment against the 3Ps (1) Profits (2) People (3) Planet. For example;

Profit: A packaging manufacturer reinventing its profits in a State- of-the-art recycling machinery for it wasted cardboard.

People: A large privately owned call centre donate its end of life computers to a local youth clubs and social groups to help gain internet cases.

Specification is a detailed description of what is required or needed. Due to certain reasons, needs sometimes increase in importance or lose their essence, therefore speci-fications need to adapt and develop to reflect the changing requirements of the con-sumer and also to comply with regulations and legislatures as this are amended.

Standard, regulations and legislation are continually evolving and new updated versions of existing guideline, as well as completely new initiatives one being released.