CIPS L4M8 Procurement and Supply in Practice Exam Practice Test

Terms are the right and duties agreed between parties which are then documented in contract. Terms can be implied or expressed.

Implied terms are always present in a contract and are set by national laws; implied terms do not have to be written or verbally agreed : they always exist, for example sales of Gods Act, good being fit for purpose, Negligence ,confidence , whereas expressed terms are negotiated and agreed rather than being automatically included, express terms are agreed between, parties negotiating the contract. For example; payment terms, specification, delivery details and quantities.

The reputation of all the organizations within a supply chain is linked. A Company’s reputation is an intangible asset that can contribute to the failure of an organization if damaged. Factors that could damage organizational reputation within the supply chain are;

1. Quality: if the product or service quality is poor the organization may not satisfy it customers and this can lead to a loss of reputation in the market. For example, a residential building construction company contracting a supplier that would do a bad job which in three months may require home owners to reinstall new doors.

2. Sustainability: if the organization is not replenishing that which it is extracting, it will some day run out of business or probably loss loyal customers. For example a drilling company that spills hydrocarbon as it drills.

3. Fit for purpose: if an organization produce a product or carry out services that are not fit for purpose, it may run at loss for there will be so much rejection and rework. This can lead to customers switching to another organization which product or services are fit for their purpose.

4. Contract management: an organization will have to manage its suppliers and the contracts to ensure they are delivering what they were contracted to do. A poor contract management is a waste in the process of delivery that can lead to reputational loss.

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Fraud occurs when a person acts deliberately to secure monies from another party through dishonest method. Within the supply chain of an organization, fraud can represent itself in the following ways:

1. Kickbacks: e.g. (commission given to a bribe taker for service perform)

2. Corrupt influence (e.g ordering more than what is required)

3. Collusion: (group of suppliers working together to submit multiple bids and split profit.

4. Bid Rigging (a contract is informally agreed with a chosen supplier prior to the official process

5. invoicing fraud

6. Substitution (submitting products that are below the required quality

7. False claims (files false document)

Case Study

A series of news stories reporting events such as the collapse of the Rana Plaza building in 2013 have drawn attention to the poor conditions in garment factories across India and South East Asia. Human rights groups have long be critical of the excessive hours and poor wages workers are forced to endure, as well as the abuse they receive from supervisor. With consumers becoming increasingly aware of these conditions, more pressure is being put on global brands and retailers to ensure their supply chains are fair and ethical.

Certain areas have been notorious for the mistreatment of workers. In India’s textile valley’, young women are been bound into contracts where they work for two to three years, in exchange for a lump sum of money that they can then put towards a dowry. This is known as the ‘Sumangali [a married woman] Thittam’ scheme. These women are forced to live in hostels under restrictions that prevent them from moving, and are denied the opportunity to improve their living conditions. Retailers including Walmart and H&M are known to source garments from factories in the ‘textile valley’.

Reports by organizations including the Asia Floor Wage Alliance (AFWA), Central Combodia, Global Labor Justice, Sedane Labour Resource Centre (LIPS) Indonesia, and Society for Labour and Development (SLD) India have exposed unethically run factories that supply garments to H&M, Gap and Walmart. However, retailers will continue to benefit from expensive labour until mounting customers pressure causes them to change.

The procurement cycle is the heart of purchasing, sourcing and supplying and should be followed in day-to-day practice in the industry. The procurement cycle has thirteen stages. Contract award is stage 9, and the stages after the contract award are;

Stage 10: ware house, logistic and receipt

Stage 11: Contract performance review and continuous improvement

Stage 12: SRM/SCM and contract management

Stage 13: Asset management, lessons learned, end of life.

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.

Responsible and ethical sourcing promotes working with suppliers who want to have a positive effect on the environment or at least minimize the damage they cause. Suppliers can make effort to reduce their impact on the planet through reducing the pollution, taking steps to recycle or reuse products can improve on supplier’s impact on the environment, also supplier can consider sustainability as another environmental factor. Suppliers with strong values on ethics will have a programme to return anything taken from nature in the form of replanting or replacing

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.

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.

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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Disposal of an asset is the final stage in the decommissioning process of a fixed asset.

When a fixed asset reaches the end of its useful or cost effective life time within an organization, the decision is made as to whether it should be removed from the premises or disposed off.

If the asset is truly at the end of its life, no longer fit for purpose, not cost effective to repair and is not able to be exchanged, then disposal is the only option; there are two options for disposal;

1) Take the asset to land fill site

2) Taking the asset to a recycling plant.

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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Assets are things that an organization owns regarded as having value and available to meet debt and generate revenue. The following are list of assets owned by Fullpower project, a shoe manufacturing firm;

1) Machinery,

2) a factory,

3) an innovative software,

4) skills of its personnel,

5) land,

6) Distribution network.

7) Its long time relationship with experienced suppliers of raw materials and Distributors of finished shoes.

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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Terms are the right and duties agreed which are then documented in a contract. Five types of con-tract terms that a procurement professional should create with a supplier when forming an agree-ment includes;

Price term is when the buying organization wants to protect its budged and spending, it include price terms in the contract, for the buyer to buy goods or services in response to a need they some-time enshrine a bespoke specification in the contract.

Payment Term is to specify when and how the buyer will pay the supplier. The buyer may include a payment term in the contract.

Warrantee is when the buyer requires a promise from the supplier that the product or service will meet the specified need in the contract.

Time is of the essence term is included in the contract to detail when a product or service should be delivered and explains the potential losses of business if time is not observed.

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Fullpower projects is a training firm that trains on project management and procurement. It has the following values and ethical code of practice

1) Accountability

2) selflessness

3) openness

4) integrity

5) objectives

6) Honesty

7) Leadership

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 plan, 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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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.

A business case is a document containing the justification and the commercial benefits achievable for a potential project or an identified need, for example, the purchase of a capital equipment, con-struction of an additional warehouse or procuring more innovative software to replace the current on in use.

The essence of the business case is to obtain support and get buy-in from senior management.

In order to gain authority to apply whole life asset management a business case will need to be created and presented. A developed business case will cover the following element.

1) Introduction: Outline of what the business case is all about

2) Objective: Explanation of what the business case desired outcome is.

3) Approach that will be undertaken

4) List of resources required

5) Benefits of achieving the objective

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Pre-qualification questionnaire (PQQ) is often standard forms that buyers send to po-tential suppliers. The purpose is to ensure that these potential suppliers could, if they win the contract, supply the product or service to the standard required. PQQ includes requesting details from the potential suppliers on the following information

1. Company Details

2. Environment policies

3. Trading history

4. Ethical policies

5. Financial information

6. Health and safety policies

7. Quality standards

8. References

9. Insurance.

A current ratio of 1 shows that the organization has enough assets to repay (cover) it liability

Buyers can be encouraged to deal with these suppliers after if they considered proven and strong in other areas.

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The purpose of the tendering process is to invite potential suppliers to bid to supply a product or service to the buying organization. Then buying organization select suitable suppliers, award con-tract and manage. The process is selected mostly when the need is a large or complex project or the law mandates it or it is in the company’s policies to do so. The stages of the tendering process includes;

Stage 1: decide which style of tender to use. There are four types of tendering used within pro-curement and this include; 1) open 2) Restricted 3) Negotiated 4) Competitive Dialogue

Stage 2: Prepare invitation to tender (ITT): this stage is to prepare the document that will be made available to potential supplier. It should contain everything potential bidders will need to know to fully understand the need and to prepare and send a suitable RESPONSE it may likely in-clude; open letter, company details, overview of a project, evaluation criteria, submission date and so on.

Stage 3: send ITT: With fairness, transparency and equality, buyer will provide the documents to all potential suppliers at the same time and also provide exactly the same information/documents to all suppliers. If after receiving the ITT and some suppliers seek clarifications on anything in the documentation, buyers must give same response to identical questions to keep the process transparent and fair. Also, the response to each query to all bidders in the process.

Failure to this may result in bidders who feel disadvantaged or discriminated in any form to submit a legal challenge. Supplier submitting a Legal challenge may cause delay in the process and eventually increase administrative cost for the buyer.

Stage 4: Buying organization receives responses to the Invitation to tender from suppliers (bids). Suppliers must adhere to the bid submission dead line included in the invitation to tender document. Any bid that arrives after the deadline must be left out of the process, or else this may result to other suppliers legally challenging the process.

Stage 5: Evaluate bid. The buying organization can now evaluate the bids based on the criteria in the ITT document. It is always thorough that cross-functional team evaluates the bids to guarantee complete fairness and ensure that the chosen bid is fit for purpose. In evaluating the bids, the cross-functional team will consider the bids in the following areas; supplier organization, ethics, price, sustainability, quality, payment, disposal, service level, location, warranty and risk.

Stage 6: Award contract and give feedback hence the buying organization wards the contract to the winning supplier. This can take place by a formal communication like a letter or an e-mail.

Stage 7: Contract management. Contracts must be evaluated against the criteria in the invitation to tender.

The reasons why these stages must be followed includes;

1. Knowing the right TYPE of tender to use, reduces administration cost, for example, deciding to do restricted tendering to reduce the interest that are going to be sent in have already cut down on administrative cost.

2. The supplier can know what exactly the buyer’s intentions are by developing description and the required specification.

3. To ensure that objectives of resorting to use the tendering style and the tendering process is achieved

4. To ensure that the organization generates added value by going through the stages.

5. To ensure that there are none unethical issues like fraud, bribes etc are not part of the system.

6. To ensure that the tendering process becomes transparent to all suppliers. These stages must be followed for transparency and fairness. Just like in stage 3: buyer send out the ITT to potential suppliers at the same time and providing them same information. Failure to this and bidders who feel disadvantaged or discriminated in any form may submit a legal challenge. Supplier submitting a Legal challenge may cause delay in the process and eventually increase administrative cost for the buyer.

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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.

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It would be rare to find a supplier who does not emit any form of pollution. However, part of ethical and responsible sourcing is to make effort to reduce impact of population on the planets. Pollution can be factory emission, Noise, smell, Transportation Development, waste disposal. Transportation is a major cause of pollution. The carbon dioxide emitted from vehicles contributes greatly to air contamination. Yet it is better to use sea freight rather than air because it has a smaller impact on the environment.