L4M2 Defining Business Needs Question and Answers

Explanation

A product’s life cycle portrays the length of time a product is in the market; from the beginning of its introduction to consumers until it is removed from shelves and phased out. This cycle is often divided into four phases: introduction, growth, maturity, and decline. Depending on the relevant stage, companies will set an according strategy to achieve their desired targets. Pricing and promotions play a pivotal role in the design of these product life cycle strategies. Therefore, product life cycle management, the process of strategizing ways to continuously support and maintain a product, is seen more and more at pricing mature players and could bring real value to your company.

Introduction phase: during the introduction phase, the new product is introduced to consumers and a substantial amount of money is invested in advertising and marketing campaigns to bring awareness of the product to the customer. In this phase competition is low, but units sold will also correspondingly be quite low as well still. Consumers need to be convinced of the benefits of the product. Lots of articles never make it beyond this phase: e.g. 3D televisions.

Profits in the introduction stage tend to be low or there may even be a loss. This is because the cost of marketing to establish product awareness plus distribution costs can be far higher than the revenue received from sales. This can be offset to a degree by 'skimming' price in the very early stages. Skimming a price is where a business charges the highest price that it thinks the market will bear initially until product recognition brings in other buyers and then the price drop.

Growth phase: when it’s shown there is proven demand for the product and consumers are buying it, the next stage will be its growth phase. This phase is punctuated by increasing demand, increas-ing production and an increase in the competitive landscape. Availability of the product is under-standably paramount during this phase, going out of stock is unthinkable during the growth period.

The electric car is an example of a product that is currently in the midst of the growth phase.

Maturity phase: normally the maturity phase is the phase that is characterized by declining production and marketing costs due to synergies and economies of scale. During this phase the first signs of market saturation occur and most consumers or households already own the product. Sales numbers still grow, but at a slower pace. In the maturity phase, price competition becomes intense, a broader range of distribution channels are deployed and competition is more focused on competitive pricing, marginal product differences or the difference in services or promotions. This period in the PLC is often said to be the ‘cash-cow period’.

That being said, the idea of ‘Maturity from the start’ also exists. This occurs when a brand decides to launch a product extension and directly follows up the maturity phase of an earlier version of the product. For example, the iPhoneX followed up from the ‘normal’ iPhone-series and therefore the iPhoneX never had to undergo the introduction or growth phase, but immediately started in its maturity phase.

Decline phase: the final phase of the PLC is entered once the product loses market share to other, newer products and the competitive landscape becomes too hard to survive. During this stage, de-mand declines, companies are left with overstock with prices and margins getting depressed. Therefore retailers and brands normally start stunting with promotions during the decline of the PLC to sell their final stock.

A well-known example of a product that has been through the decline phase were the Nokia phones; sales results dramatically decreased after the introduction of the iPhone.

Explanation

When using conformance specification, the buying organisation is responsible for the performance of the purchase. If the product fails due to poorly designed specification, the buyer is wholly responsible for it. It cannot blame the supplier for the failure because they still provided 'fit for purpose' product.

'Time to produce specification is shortened': Conformance specification requires details on dimen-sion, materials, design, etc. With such requirements, time to produce a complete conformance specification is often longer than producing performance specification.

'Buyer cannot control the inputs': Conformance specification is a list of inputs from buyer, so buyer has control over the inputs that will make the product. It also means that buyer is responsible for any product failure.

'Buyer may face liquidity risks': Liquidity means that how quick a business turns its assets into cash. This is a financial term, it does not link directly with specification failure.

Explanation

Robots in manufacturing help to create jobs by reshoring more manufacturing work. Robots protect workers from repetitive, mundane and dangerous tasks, while also creating more desirable jobs, such as engineering, programming, management and equipment maintenance.

LO 2, AC 2.1

Explanation

Industry rivalry—or rivalry among existing firms—is one of Porter’s five forces used to deter-mine the intensity of competition in an industry. Other factors in this competitive analysis are:

- Barriers to entry

- Bargaining power of buyers

- Bargaining power of suppliers

- Threat of substitutes

Industry rivalry usually takes the form of jockeying for position using various tactics (for example, price competition, advertising battles, product introductions). This rivalry tends to increase in intensity when companies either feel competitive pressure or see an opportunity to improve their position.

In most industries, one company’s competitive moves will have a noticeable impact on the competition, who will then retaliate to counter those efforts. Companies are mutually dependent, so the pattern of action and reaction may harm all companies and the industry.

Some types of competition (for example, price competition) are very unstable and negatively influence industry profitability. Other tactics (for example, advertising battles) may positively influence the industry, as they increase demand or enhance product differentiation.

References

Porter, M. (1998). Competitive Strategy. New York: Free Press. pp. 17-23.

CIPS study guide page 86-87

LO 2, AC 2.2

Explanation

A monopoly is a market with a single seller (called the monopolist) but with many buyers. In this market, the bargaining power of supplier is higher than of buyer since the supplier is the only seller.

Explanation

A business case is developed during the early stages of a project and outlines the why, what, how, and who necessary to decide if it is worthwhile continuing a project. One of the first things you need to know when starting a new project are the benefits of the proposed business change and how to communicate those benefits to the business.

Preparing the business case involves an assessment of:

- Business problem or opportunity

- Benefits

- Risk

- Costs including investment appraisal

- Technical solutions

- Timescale

- Impact on operations

- Organizational capability to deliver the project outcomes

These project issues are an important part of the business case. They express the problems with the current situation and demonstrate the benefits of the new business vision. Making business case with multiple options and choices also prompts the procurement and senior management to consider alternatives. As a result, the organisation may opt out the best option.

The business case brings together the benefits, disadvantages, costs, and risks of the current situa-tion and future vision so that executive management can decide if the project should go ahead.

Explanation

Primary activities consist of inbound logistics, operations, outbound logistics, sales & marketing, service.

Second activities consist of firm infrastructure, human resource management, technology development and procurement

The following graph illustrate the value chain (Source: Smartsheet)

Graphical user interface, diagram Description automatically generated

Picking and delivery components is inbound logistics.

Maintenance is an example of operations activity.

Sourcing transportation services is an activity of procurement

Assembly design is an activity in research and development (Technology)

Recruiting is an activity of human resource management

Explanation

Cracks on the jet engine is a closed-end problem. A typical problem solving process has 8 steps:

Step 1: Define the Problem

- What is the problem?

- How did you discover the problem?

- When did the problem start and how long has this problem been going on?

- Is there enough data available to contain the problem and prevent it from getting passed to the next process step? If yes, contain the problem.

Step 2: Clarify the Problem

- What data is available or needed to help clarify, or fully understand the problem?

- Is it a top priority to resolve the problem at this point in time?

- Are additional resources required to clarify the problem? If yes, elevate the problem to your leader to help locate the right resources and form a team.

- Consider a Lean Event (Do-it, Burst, RPI, Project).

- Ensure the problem is contained and does not get passed to the next process step.

Step 3: Define the Goals

- What is your end goal or desired future state?

- What will you accomplish if you fix this problem?

- What is the desired timeline for solving this problem?

Step 4: Identify Root Cause of the Problem

- Identify possible causes of the problem.

- Prioritize possible root causes of the problem.

- What information or data is there to validate the root cause?

Step 5: Develop Action Plan

- Generate a list of actions required to address the root cause and prevent problem from getting to others.

- Assign an owner and timeline to each action.

- Status actions to ensure completion.

Step 6: Execute Action Plan

- Implement action plan to address the root cause.

- Verify actions are completed.

Step 7: Evaluate the Results

- Monitor and Collect Data.

- Did you meet your goals defined in step 3? If not, repeate th 8-Step Process.

- Were there any unforeseen consequences?

- If problem is resolved, remove activities that were added previously to contain the problem.

Step 8: Continuously Improve

- Look for additional opportunities to implement solution.

- Ensure problem will not come back and communicate lessons learned.

- If needed, repeat the 8-Step Problem Solving Process to drive further improvements.

ANA has already known what is going on, the next step they should adopt is collecting more infor-mation on the problem. If the airline is hurry to the solution, it may choose 'Generate options ad-dressing the issue'. The crack on turbine blade can be welded, or the airline replaces a new blade. However, jumping to solution without knowing the root cause does not completely solve the prob-lem. The root cause is unaddressed, then it may occur in the future. Therefore, the airline should still collect information to find the root cause, then remove it.

Explanation

Marketing plays a critical role in sales. The marketing department introduces products to the con-sumer, and creates strategic messaging that elevates appeal and ultimately drives sales. The feed-back and response from consumers is measured by the marketing team on a variety of levels. Ad-vertising is one means of seeing what performs and what does not perform. Marketers will note trends and demand in their specific markets. This plays into new product development, because the marketing team can work with product developers to create products based on that demand.

In development of specification, the role of marketing is largely the same. They provide the market insight so that right specification is developed and it matches the demands from customers.

Explanation

Labour variance refers to a situation in which actual costs of labor differ from projected or budgeted labor costs. This concept is most commonly applied in manufacturing environments.

Labour variance either results from efficiency or rate discrepancies. Efficiency variance results when actual time worked is more or less than budgeted time for a project. Rate variance means you paid more per hour worked than expected. This may occur with overtime pay or when you have higher paid employees on a project than projected. Labour variance is fairly typical, but modest variance is usually not a big factor in manufacturing, because materials and other production costs are often much higher.

LO 1, AC 1.4

Explanation

The purpose of this QUESTION NO: is to test the student's ability to identify the problems and translate those problems to actionable requirements before communicating with the suppliers. The scenario suggests that Synergy Ltd's customer services team is using Excel spreadsheets, they lack a centralised customer database. This leads to problems in communications with customers.

A CRM system can solve the communication problem. But a QUESTION NO: arises: If a CRM system is employed, how will the previous data be imported? If the CRM system can support bulk import from Excel tables, it will save a lot of time.

Detailed Explanation:

Dual or multiple sourcing introduces competition, reducing the sole supplier's bargaining power and leading to cost reductions. Framework agreements (A) or economies of scale (D) may not address the immediate need to reduce rates. Reference: CIPS Level 4, Sourcing Strategies.

Explanation

The instrument plays a crucial role in steel manufacturing because it presents in the majority of products, in which case lacking this instrument would have significant impact on the organisation's output (production lines stop or damaging other machine). Otherwise, the risk of supply is high because there is limitation in supply. Therefore, it is considered as a strategic item in term of Kraljic's portfolio matrix. Procurement manager should form partnership with suppliers to maximise the value.

The following graph illustrates Kraljic's portfolio matrix:

Explanation

Start-up costs are generally low in service industries, and the main requirement is a level of knowledge and skill in that particular service.

LO 2, AC 2.1

Explanation

Market analysis is a stage in CIPS Procurement and Supply Cycle. This stage informs the purchaser about the number of suppliers, the average pricing, and product trends. Even urgent purchase should undergo market analysis. Without undertaking this stage, the buying organisation may not purchase the right product, or they may purchase at higher price.

Explanation

In construction, specifications are written documents that describe the materials and workmanship required for a development. They do not include cost, quantity or drawn information but need to be read alongside other contract documentation such as quantities, schedules and drawings.

Specifications vary considerably depending on the stage to which the design has been developed, ranging from performance (open) specifications that require further design by a contractor or sup-plier, to prescriptive (closed) specifications where the design is already complete when the project is tendered.

Prescriptive specifications give the client more certainty about the end product when they make their final investment decision (i.e. when they appoint the contractor), whereas a performance specification gives the contractor and suppliers more scope to innovate and adopt cost effective methods of work, potentially offering better value for money.

Typically, performance specifications are written on projects that are straight-forward, standard building types, whereas prescriptive specifications are written for more complex buildings, or buildings where the client has requirements that might not be familiar to contractors and where certainty regarding the exact nature of the completed development is more important to the client.

Performance specification has some disadvantages:

- Well-defined performance metrics are needed to ensure that the specified performance will achieve the desired outcome

- Require reliable, practical, economical tests of performance

- Evaluations are subjective and require additional time and effort to complete

Therefore, if a performance specification is used, the buying organisation will have to ensure that they are able to define and conduct tests on whether supplier's solution can deliver the desired out-come.

Explanation

Writing a high-quality specification is very crucial in every purchase. In through-life management, it is even more important since the assets often have very high value. Defining user requirement is the first step to write a specification. Without doing this right, many problems may arise in later stages.

Explanation

3D-printed parts can replace traditional metal parts. They are also more easily customised to fit customer's needs. This technology is an example of threat of substitute in Porter's Five Forces model.

Substitute goods or services that can be used in place of a company's products or services pose a threat. Companies that produce goods or services for which there are no close substitutes will have more power to increase prices and lock in favorable terms. When close substitutes are available, customers will have the option to forgo buying a company's product, and a company's power can be weakened.

Explanation

The following are typical social criteria in procurement:

• Reducing unemployment

• Preventing the use of child labour

• Preventing discrimination on the grounds of race, religion, disability, sex or sexual orientation

• Encouraging good employment practice

• Reducing local unemployment

• Reducing social exclusion

• Promoting training opportunities for the young or disadvantaged

• Encouraging access to work for people with disabilities

Detailed Explanation:

De-regulation removes barriers to entry, encouraging new suppliers to enter the market. Other factors, like high investment or stringent requirements, limit supplier participation. Reference: CIPS Level 4, Market Entry and Supply Chain Factors.

Explanation

Direct costs are directly associated with the production of a good or service. In this question, 'An employee is hired to work on a project, either exclusively or for an assigned number of hours' and 'Raw materials' are directly related to producing the product.

Indirect costs are the general costs of the organisation - these costs cannot easily be attributed to specific products or services (also known as overheads). 'The materials and supplies needed for the company’s day-to-day operations' or 'Clerical assistants who maintain the office' or 'Advertising and marketing communication' is example of indirect cost.

Explanation

There are four common types of budgets that companies use: (1) incremental, (2) activity-based, (3) value proposition, and (4) zero-based.

Incremental budgeting takes last year’s actual figures and adds or subtracts a percentage to obtain the current year’s budget. It is the most common method of budgeting because it is simple and easy to understand.

Activity-based budgeting is a top-down budgeting approach that determines the amount of inputs required to support the targets or outputs set by the company. For example, a company sets an out-put target of $100 million in revenues. The company will need to first determine the activities that need to be undertaken to meet the sales target, and then find out the costs of carrying out these ac-tivities.

In value proposition budgeting, the budgeter considers the following questions:

- Why is this amount included in the budget?

- Does the item create value for customers, staff, or other stakeholders?

- Does the value of the item outweigh its cost? If not, then is there another reason why the cost is justified?

Value proposition budgeting is really a mindset about making sure that everything that is included in the budget delivers value for the business. Value proposition budgeting aims to avoid unneces-sary expenditures – although it is not as precisely aimed at that goal as our final budgeting option, zero-based budgeting.

As one of the most commonly used budgeting methods, zero-based budgeting starts with the as-sumption that all department budgets are zero and must be rebuilt from scratch. Managers must be able to justify every single expense. No expenditures are automatically “okayed”. Zero-based budgeting is very tight, aiming to avoid any and all expenditures that are not considered absolutely essential to the company’s successful (profitable) operation. This kind of bottom-up budgeting can be a highly effective way to “shake things up”. This is the method used in the scenario.

Explanation

IT equipment is typically linked with through-life contracts. This type of contract not only deal with the specification and the price of a machinery, but also other stages such as design, manufacture, installation, in-service support, decommission and disposal. Among these stages, the design stage is when buyer's requirements are translated into technically correct specification.

Detailed Explanation:

Conformance specifications are highly detailed, covering exact materials, dimensions, tolerances, and technical drawings. They ensure precision in manufacturing and consistency between suppliers. Reference: CIPS Level 4, Specification and Contract Development.

Explanation

Value analysis is often defined as a systematic process for improving the value of a product, service or project. It is typically used in the following ways:

- To determine the value of each component used

- To find cost reduction opportunities by optimising the components used

Segment analysis helps procurement and supply to shape and manage the supply markets.

There is no concept known as Variety reduction.

Standardisation is the process which is used to reduce varieties of products or parts.

In this scenario, the company's objective is cost reduction, then value analysis or value engineering is more likely to be applied. Also the company aims at reducing variety, standardisation can be combined with value analysis to produce the best results.

LO 3, AC 3.4

Explanation

Closed problem is something happens that should not have happened. To solve this type of prob-lem, procurement professional should find a way to correct the situation or try to adapt to it. On the other hand, open ended problem is a obstacle to your short-term objective. You will need to overcome this obstacle.

Shortage of key medicines is a situation in which procurement must find a substitution or try to save the current stock.

In case of cyber attack, procurement should find a way to recover the IT system as soon as possible.

Otherwise, 'There are not enough data for procurement analytics' is an open-ended problem be-cause it prevents company to conduct procurement analytics (an objective).

'Logistics costs incur a large portion in wholesale prices': In this situation, logistics costs are hur-dles that prevent companies to reach lower wholesale.

'The suppliers don’t comply with the company’s policy on underage labour': In this situation, pro-curement should seek ways to help supplier comply with the company's labour policy.

LO 1, AC 1.1

Explanation

The buyer won't pay the supplier until next month. This is a liability to the buyer. This amount can be recorded as accrued expense or accounts payable. On the other hand, the supplier has not sent the invoice, so it should be accrued expense.

Both accounts payables and accrued expenses are liabilities. Accounts payable is the total amount of short-term obligations or debt a company has to pay to its creditors for goods or services bought on credit. With accounts payables, the vendor's or supplier's invoices have been received and recorded.

On the other hand, accrued expenses are the total liability that is payable for goods and services that have been consumed by the company or received. However, accrued expenses are those bills in which an invoice or bill has not yet been received. As a result, accrued expenses can sometimes be an estimated amount of what's owed, which is adjusted later to the exact amount, once the invoice has been received.

Conversely, accounts payable should represent the exact amount of the total owed from all of the invoices received.

Explanation

Assessing the risks by quantifying them should be done. Even with qualitative risk assessment, quantifying is still important since risks need to be prioritised.

Risk assessment can be qualitative or quantitative. Perform qualitative and perform quantitative risk analysis are two processes within the project risk management knowledge area, in the planning process group. While qualitative risk analysis should generally be performed on all risks, for all projects, quantitative risk analysis has a more limited use, based on the type of project, the project risks, and the availability of data to use to conduct the quantitative analysis.

Qualitative Risk Analysis

A qualitative risk analysis prioritises the identified project risks using a pre-defined rating scale. Risks will be scored based on their probability or likelihood of occurring and the impact on project objectives should they occur.

Probability/likelihood is commonly ranked on a zero to one scale (for example, .3 equating to a 30% probability of the risk event occurring).

The impact scale is organizationally defined (for example, a one to five scale, with five being the highest impact on project objectives - such as budget, schedule, or quality).

A qualitative risk analysis will also include the appropriate categorization of the risks, either source-based or effect-based.

Quantitative Risk Analysis

A quantitative risk analysis is a further analysis of the highest priority risks during a which a numerical or quantitative rating is assigned in order to develop a probabilistic analysis of the project.

A quantitative analysis:

- Quantifies the possible outcomes for the project and assesses the probability of achieving specific project objectives

- Provides a quantitative approach to making decisions when there is uncertainty

- Creates realistic and achievable cost, schedule or scope targets

In order to conduct a quantitative risk analysis, you will need high-quality data, a well-developed project model, and a prioritized lists of project risks (usually from performing a qualitative risk analysis).

Explanation

In this scenario, the final product has vast range of parts. The second problem is lacking any part can cause disruption to the production process. So GE has 2 things to do: to reduce the part varie-ties, and secure the supply. Part standardisation is the best option here. It can simplify the range of parts or materials used, and simultaneously, it expands the supply base of GE. If a supplier fails to deliver the part, the company always has other options to replace.

Costs are also a concern, but bottleneck in production imposes a serious risk to the organisation. Driving down costs using market competition cannot be a foremost priority.

Increasing production may help to reduce bottleneck. However, it will also increase the inventory of finished products and unnecessary upkeep costs.

LO 3, AC 3.4

Explanation

There are two major types of specification: conformance and performance specifications. They have the following characteristics:

Table Description automatically generated

Since performance specification is often a list of outputs or outcomes, it usually takes less time to develop than conformance specification.

Explanation

Payback period is the time in which the initial outlay of an investment is expected to be recovered through the cash inflows generated by the investment. It is one of the simplest investment apprais-al techniques.

Since cash flow estimates are quite accurate for periods in the near future and relatively inaccurate for periods in distant future due to economic and operational uncertainties, payback period is an indicator of risk inherent in a project because it takes initial inflows into account and ignores the cash flows after the point at which the initial investment is recovered.

The formula to calculate the payback period of an investment depends on whether the periodic cash inflows from the project are even or uneven.

If the cash inflows are even (such as for investments in annuities), the formula to calculate payback period is:

Payback Period = Initial Investment / Net Cash Flow per Period

When cash inflows are uneven, we need to calculate the cumulative net cash flow for each period and then use the following formula:

Payback Period =A + (B/C)

Where,

A is the last period number with a negative cumulative cash flow;

B is the absolute value (i.e. value without negative sign) of cumulative net cash flow at the end of the period A; and

C is the total cash inflow during the period following period A

Cumulative net cash flow is the sum of inflows to date, minus the initial outflow.

Explanation

A responsibility assignment matrix[1] (RAM), also known as RACI matrix[2] (/ˈreɪsi/) or linear responsibility chart[3] (LRC), describes the participation by various roles in complet-ing tasks or deliverables for a project or business process. RACI is an acronym derived from the four key responsibilities most typically used: responsible, accountable, consulted, and informed.[4] It is used for clarifying and defining roles and responsibilities in cross-functional or departmental projects and processes.[5] There are a number of alternatives to the RACI model.

Role distinction[edit]

There is a distinction between a role and individually identified people: a role is a descriptor of an associated set of tasks; may be performed by many people; and one person can perform many roles. For example, an organization may have ten people who can perform the role of project manager, although traditionally each project only has one project manager at any one time; and a person who is able to perform the role of project manager may also be able to perform the role of business analyst and tester.

R = Responsible (also recommender)Those who do the work to complete the task.[6] There is at least one role with a participation type of responsible, although others can be delegated to assist in the work required (see also RASCI below for separately identifying those who participate in a sup-porting role).

A = Accountable (also approver or final approving authority)The one ultimately answerable for the correct and thorough completion of the deliverable or task, the one who ensures the prerequi-sites of the task are met and who delegates the work to those responsible.[6] In other words, an accountable must sign off (approve) work that responsible provides. There must be only one accountable specified for each task or deliverable.[7]

C = Consulted (sometimes consultant or counsel)Those whose opinions are sought, typical-ly subject-matter experts; and with whom there is two-way communication.[6]

I = Informed (also informee)Those who are kept up-to-date on progress, often only on completion of the task or deliverable; and with whom there is just one-way communication.[6]

Very often the role that is accountable for a task or deliverable may also be responsible for com-pleting it (indicated on the matrix by the task or deliverable having a role accountable for it, but no role responsible for its completion, i.e. it is implied). Outside of this exception, it is generally recommended that each role in the project or process for each task receive, at most, just one of the participation types. Where more than one participation type is shown, this generally implies that participation has not yet been fully resolved, which can impede the value of this technique in clarifying the participation of each role on each task.

Detailed Explanation:

Zero-based budgeting emphasizes starting from scratch and justifying all expenses.

3 (Budget flexibility): Ensures resources are allocated dynamically based on needs.

4 (Focus on operational issues): Encourages alignment with operational priorities rather than historical trends.Using prior figures (1) is contrary to zero-based budgeting principles. Reference: CIPS Level 4, Financial Planning and Budgeting.

Explanation

Competitive benchmarking

Competitive benchmarking is a direct competitor-to-competitor comparison of a product, service, process, or method. This form of benchmarking provides an opportunity to know yourself and your competition better; combine forces against another common competitor. An example of competitive benchmarking within the Department of Defense, might include contrasting Army and Air Force supply systems for Joint initiatives. Within the private sector, two or more American car companies might benchmark for mutual benefit against common international competitor; or, rival chemical companies benchmark for environmental compliance.

Benefits

- Comparing like processes

- Know your competition better

- Possible partnership

- Useful for planning and setting goals

- Similar regulatory issues

Challenges

- Difficult legal issues

- Relatively low performance improvement

- Threatening

- Limited by trade secrets

- May provide misleading information

- May not get best-in-class comparisons

- Competitors could capitalize on your weaknesses

Source: USN Benchmarking Handbook

Explanation

There are three major types of buying situations, which are new purchase, modified rebuy and straight rebuy. Three factors make the buying situations be different from the others, customers may face different problems in these situations.

A new purchase is a situation requiring the purchase of a product for the very first time.

A straight rebuy is when a company places a second order with a supplier that is identical to the first purchase it made.

A modified rebuy is when a company orders again from a supplier, but wants to change some as-pect of the order, such as the quantity, packaging, product features, or delivery times. The scenario above is an example of modified rebuy.

Detailed Explanation:

Quantity discounts: Changes in order quantities can lead to cost savings, impacting budget forecasts.

Substitute goods: Using alternative products can alter planned expenses, causing budget deviations.Loan repayments and taxes are fixed financial obligations and do not directly impact procurement budgeting. Reference: CIPS Level 4, Cost Management.

Explanation

"A firm's relative position within its industry determines whether a firm's profitability is above or below the industry average. The fundamental basis of above average profitability in the long run is sustainable competitive advantage. There are two basic types of competitive advantage a firm can possess: low cost or differentiation. The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation, and focus." (Reference: Porter, Michael E., "Competitive Advantage". 1985, Ch. 1, pp 11-15. The Free Press. New York.)

Creating stand-out products and brands is considered as Differentiation. An organisation that is not clear about which of these three strategies to use is described as 'stuck in the middle'

LO 2, AC 2.1

Detailed Explanation:

When the buyer does not align with the supplier’s strategic interests, the supplier may take advantage by charging higher prices to compensate for the perceived lack of value. This approach maximizes the supplier’s benefit from a transactional relationship. Reference: CIPS Level 4, Supplier Engagement and Negotiation Strategies.

Explanation

Statement of Work (SoW) is the document that captures and defines all aspects of your project. You’ll note the activities, deliverables and the timetable for the project. It’s an extremely detailed document as it will lay the groundwork for the project plan.

Project Initial Document is an important document and should precede any specification writing project. It sets out the scope of the project and it is the team's mandate from senior management

Work instructions are also called work guides, Standard Operating Procedures (SOPs), job aids or user manuals, depending on the situation. In any case, the purpose of work instructions is to clearly explain how a particular work task is performed.

Framework agreements are arrangements between one or more buyers and one or more suppliers that provide the terms governing contracts to be established for a certain period of time, in particular with regard to price and, where necessary, the quantity envisaged.

Detailed Explanation:

Conformance specifications are appropriate when the buyer has precise requirements that must be met. This ensures the final product aligns perfectly with the company’s needs, even if it limits supplier flexibility. Reference: CIPS Level 4, Conformance Specification in Procurement.

Explanation

Using standards in specification is very convenient. They reduce the time and effort to produce. They tend to be very accurate with correct technical terminologies. They are well recognised and accepted by a wide range of suppliers and buyers. However, since a standard is very specific, complex and lengthy, it requires a lot of time to be drafted and approved. Therefore, standard tends to be static and don't encourage innovation. It may also not accommodate latest technology and trends.

Explanation

Technical standards are often produced by a national or international body such as British Standard Institute (BSI)

LO 3, AC 3.1

Explanation

This question mentions about specification in construction. In this sector, specifications are written documents that describe the materials and workmanship required for a development. They do not include cost, quantity or drawn information and need to be read alongside other contract documentation such as quantities, schedules and drawings.

Specifications vary considerably depending on the stage to which the design has been developed, ranging from performance (open) specifications that require further development by a contractor or supplier, to prescriptive (closed) specifications for which the design is already complete when the project is tendered.

Prescriptive specifications typically contain detailed descriptions of the following components:

- General requirements relating to regulations and standards.

- The type of products and materials required.

- The execution and installation methods required.

Prescriptive specifications give the client much more certainty about the end product when making investment decisions (such as when they appoint the contractor), and place a greater burden on the designer to ensure proper installation rather than the contractor.

Explanation

Functional benchmarking is a comparison to similar or identical practices (e.g., the picking process for assembling customer orders, maintaining inventory controls of spare computer parts, logistics to move operational forces, etc.) within the same or similar functions outside the immediate industry. Functional benchmarking might identify practices that are superior in your functional areas in whatever industry they may exist. Functional benchmarking would be accomplished at the federal level by comparing the IRS collections process against those of American Express. Comparing copper mining techniques to coal mining techniques is an example in the private sector.

Benefits

- Provides industry trend information

- Quantitative comparisons

- Better improvement rate

Challenges

- Diverse corporate cultures

- Great need for specificity

- Not invented here. syndrome

- Common functions can be difficult to find

- Takes more time than internal or percent

- Must be able to visualize how to adapt the best practices

Source: USN Benchmarking Handbook

LO 1, AC 1.3

Explanation

According to Kraljic portfolio matrix, the low-value items with high supply risk are bottleneck items.

The purchasing strategy that is commonly recommended for these products is primarily based on acceptance of the dependence and reduction of the negative effects of the unfavourable position. An alternative strategy suggested by purchasing practitioners is to find other suppliers and move towards the non-critical quadrant.

- Accept dependence, reduce negative consequences: The main focus of this strategy is to assure supply, if necessary even at additional cost. Examples of this strategy are keeping extra stocks of the materials concerned or developing consigned stock agreements with suppliers. By performing a risk analysis firms can identify the most important bottleneck products and consider the implications. A possible action for dealing with unexpected bad dependence positions for certain products is to employ contingency planning.

- Reduce dependence and risk, find other solutions: This strategy is geared towards reducing the dependence on the supplier. The most common way to achieve this is to broaden the specifications of the product or to search for new suppliers.

The procurement team in the scenario has selected reducing dependency by finding alternatives. This is a right strategy for bottleneck item.

Explanation

RAQSCI stands for Regulatory, Availability, Quality, Service, Cost, Innovation.

LO 1, AC 1.1

Explanation

Risk control is the process by which an organization reduces the likelihood of a risk event occurring or mitigates the effects that risk should it occur. CIPS preferred way to determine your risk control strategy is to use the four T’s Process:

Transferring Risk can be achieved through the use of various forms of insurance, or the payment to third parties who are prepared to take the risk on behalf of the organization

Tolerating Risk is where no action is taken to mitigate or reduce a risk. This may be because the cost of instituting risk reduction or mitigation activity is not cost-effective or the risks of impact are at so low that they are deemed acceptable to the business. Even when these risks are tolerated they should be monitored because future changes may make it no longer tolerable.

Treating Risk is a method of controlling risk through actions that reduce the likelihood of the risk occurring or minimize its impact prior to its occurrence. Also, there are contingent measures that can be developed to reduce the impact of an event once it has occurred. Finding an alternative sup-plier is an example of treating the risk.

Terminating Risk is the simplest and most often ignored method of dealing with risk. It is the ap-proach that should be most favored where possible and simply involves risk elimination. This can be done by altering an inherently risky process or practice to remove the risk. The same can be used when reviewing practices and processes in all areas of the business.

If an item presents a risk and can be changed or removed without it materially affecting the busi-ness, then removing the risk should be the first option considered; rather than attempting the treat, tolerate or transfer it.

Explanation

Using Porter's value chain helps procurement professionals know what are direct and indirect costs of supplier. Information on direct and indirect costs will have been collected as part of the market analysis. Information sources that may help include the following:

- Company annual reports

- Market data

- Technical data

- Request for information

- Plan visits

- Discount lists

Market data is the information that is collected and analysed by specialist organisations like Mintel, Gartner, Forrester,...

Explanation

To improve production process and reduce supply risk, Datong should collaborate with suppliers early in procurement cycle. Collaborating with suppliers in this way is often referred as Early Supplier Involvement (ESI)

'Request for quotation from potential suppliers': Quotations should only be requested if the buyer know exactly what they need. In this scenario, Datong is not yet sure about the specifications of product's components, request for quotation is not a good idea.

'Mapping out business plan': A business plan, as defined by Entrepreneur, is a “written document describing the nature of the business, the sales and marketing strategy, and the financial back-ground, and containing a projected profit and loss statement.” A business plan is not appropriate with improving production process and reducing supply risk.

'Budget controlling': Budget controlling largely concerns with dealing with budget variances. Tighter budget alone cannot lead to improved processes and fewer risks.

LO 3, AC 3.1

Explanation

According to Michael Porter, the threat of substitution, is a function of three factors:

• The relative value/ price of a substitute compared to an industry’s product

• The cost of switching to the substitute

• The buyer’s propensity to switch

(Porter, Michael E.. Competitive Advantage: Creating and Sustaining Superior Performance (p. 278). Free Press. Kindle Edition.)

Detailed Explanation:

A (Early supplier involvement): Engaging suppliers early fosters innovation by leveraging their expertise in developing solutions.

D (Outcome-based specification): Focusing on outcomes rather than rigid inputs encourages creative and flexible proposals.Conformance specifications (C) restrict innovation, and standards (E) limit supplier flexibility. Reference: CIPS Level 4, Innovation in Procurement Specifications.

Explanation

From the scenario, you can see that the project team is developing a new product. They start with analysing the functions, and the costs of delivering those functions. This is a typical process of value engineering. You may read more on value engineering from the reference paper.

Explanation

The scenario is very long with many distracting data. Students need to read carefully and use their experience to solve this problem.

The company is developing a new component which requires different type of material. But this component will not be available for mass production in 1.5 years. This means the company still needs to produce the current components with current materials until the development is finished. They must continue purchase the materials from current supplier through call-off orders. This situation is an example of straight re-buy.

Explanation

Public annual reports can be a source of information that helps the procurement professional to analyse an industry's cost and revenue using the line of best fit. Line of best fit is one of the most important outputs of regression analysis. Regression refers to a quantitative measure of the relationship between one or more independent variables and a resulting dependent variable. Regression is of use to professionals in a wide range of fields from science and public service to financial analysis.

In this case, by collecting and analysing 17 annual reports, the procurement manager can find the line of best fit which goes approximately through the middle of the data points with an equal num-ber of data points above and below it.

The slope of the line of best fit is the approximate variable costs the industry. The easiest way to calculate it is to take a point at the right-hand end of the line of best fit and note its cost and output levels. Divide the cost by the output and this gives and approximate figure for the cost per unit of output or variable cost. This gives an approximate value for the industry fixed and variable costs.