Master the L4M1 Scope and Influence of Procurement and Supply 2023 Exam with Powerful Insights and Strategies.

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2. Latest Version: 6.0 Question: 1 Describe the main characteristics of, and differences between, procuring goods, services and construction works (25 points) How confident do you feel answering this question? 1- Not confident at all 2- I don't know the topic well - I could write a couple of sentences 3- I'm okay with this topic - I could write a couple of paragraphs 4- I'd be happy with this question, but I'm not an expert 5- Extremely confident- I know a lot about this topic A. 1 B. 2 C. 3 D. 4 E. 5 Answer: C,D,E Explanation: A basic response would include these points: - Characteristics of goods: tangible, homogeneous, items tend not to perish quickly, can be stored - Characteristics of services: intangible, heterogenous, inseparable (produced and consumed at the same time), no transfer of ownership, perish upon use (i.e. cannot be stored) - Characteristics of construction work: project-based procurement, includes procuring both goods and services, complex procurement which has its own set of regulations (CDM2015). - Differences between these: goods are not usually outsourced and services can be. Complexity of the supply chain (goods and construction may have a complex supply chains, but service contracts usually only involve 2 parties). Timescales – construction work has a designated timescale but procurement of goods could be a one off or long-term contract, services is usually a long-term contract. A good response would: - Provide details on what each of these characteristics mean and examples (the more examples the better). To make it easy for the examiner to read, you could include a short introduction paragraph and then the following in separate paragraphs: - Tangible / Intangible – goods are tangible, meaning you can physically see and touch them. Services are intangible – you can’t see or touch them. For example, a manufacturing organisation may purchase raw materials such as wheat and sugar- these goods are tangible and can be held in your hands. The same organisation may have a cleaning contract for an external organisation to clean the factory- this is an intangible service. Although you can see the results of the cleaning, you can’t actually physically see or hold the service they are providing. - Heterogeneous / Homogeneous – this means whether the item is always the same or is always different. Generally, goods are homogeneous (always the same)- for example if you purchase steal for use in manufacturing, steal is always the same. However, if you procure a service, this will always be different. For example, customer service will always be different – advisors will say different things each time you phone because the situation will always be different. Visit us athttps://www.certsgrade.com/pdf/l4m1/

3. - Transfer of ownership – when purchasing goods there is a transfer of ownership. For example, when a supplier delivers a product to a buyer and they pay for it, the product becomes the property of the buyer (the ownership of the product is transferred from the supplier). In services there is no transfer of ownership as there is nothing physical to transfer. - Storable (Separable/ Inseparable) – when procuring goods, it is possible to store the goods. This means they can be purchased on one day and used on another. However, this is not the case with services- the service is bought and consumed at exactly the same time. - Ability to outsource: goods are rarely outsourced. Services can be easily outsourced by a company (e.g. finance, cleaning, security). Construction is usually outsourced (for example a local council will hire an external construction company to build a new hospital rather than building this themselves). - Complexity of the supply chain: service contracts tend to only involve 2 parties – the buyer and the supplier. Goods and Construction however may have a complex supply chain. For example, if someone is buying a pen, they may buy this from a stationary supplier, but there are previous steps in the supply chain including the company who secures the raw plastic, the manufacturer and possibly a wholesaler. Construction also has a complex supply chain - often a tiered supply chain with the use of subcontractors. - Construction procurement is a sort-of hybrid between goods and services as it usually involves both e.g. hiring a brick layer to provide the service of laying the bricks, but also the bricks themselves. It is often difficult to separate the goods from the services- you will always require both and pay for both at the same time. An excellent response may also include: - Other differences in procuring these include: - Costs: procuring goods such as stationary for an office will be low-cost so may not require approval, but a service contract may require management sign off. Procuring construction projects tend to be huge sums of money - Where the budget comes from: goods and services may be operational expenditure and construction works capital expenditure. - The level of risk involved in the procurement: goods tends to be quite low risk and construction high risk. - Types of contract involved: procuring goods may be very simple and just require a PO, services is more complex so may require a formal contract or Deed of Appointment. Construction projects will require a contract due to the high value and high risk of the purchase Question: 2 Explain, with examples, the three different ways one can categorise procurement spend: direct vs indirect, capital expenditure vs operational expenditure and stock vs non-stock items. (25 points) How confident do you feel answering this question? 1- Not confident at all 2- I don't know the topic well - I could write a couple of sentences 3- I'm okay with this topic - I could write a couple of paragraphs 4- I'd be happy with this question, but I'm not an expert 5- Extremely confident- I know a lot about this topic A. 1 B. 2 C. 3 D. 4 Visit us athttps://www.certsgrade.com/pdf/l4m1/

4. E. 5 Answer: C,D,E Explanation: A basic response would mention some of the characteristics outlined in the table below: Visit us athttps://www.certsgrade.com/pdf/l4m1/

5. Remember you only have 45 minutes to write your response, so you will not have time to incorporate all the details mentioned above. A good response would: - Include examples for each of the six categories of spend. This is specifically asked for in the question so it’s important to include as many examples as you can. To do this you could take an example organisation such as a cake manufacturer and explain which of their purchases would fall into each category and why: - Direct – these are items that are incorporated into the final goods (the cakes) so would include raw materials such as flour, eggs, sugar etc - Indirect – these are items that the company needs, but don’t go into the end product. For example, cleaning products and MRO supplies for the machines - Capital Expenditure- these are large one-off purchases, such as buying a new piece of equipment such as a giant oven to cook the cakes. - Operational Expenditure – these are purchases that are required to ensure the business can function day-to-day. They may include PPE for the workers in the factory and cleaning equipment - Stock items – these are items procured in advance and held in inventory until they are needed. In a cake manufacturing factory this could be PPE for staff such as hairnets and gloves. The organisation will buy these in bulk and keep them in a stock cupboard, using these as and when they are required - Non- stock items - items that are not stored and used right away. An example would be eggs- these will need to be put directly into the cakes as they would go off if bought in advance. An excellent response may also mention: - Items can fall into multiple categories. For example, eggs are both direct and non-stock items, a new cake oven would be indirect and capital expenditure. - It is useful to use categories of spend as this helps with budgeting. Different categories may also have different processes to follow for procuring the item (this could form part of your introduction or conclusion). Question: 3 Describe what is meant by the 5 Rights of Procurement (25 points) How confident do you feel answering this question? 1- Not confident at all 2- I don't know the topic well - I could write a couple of sentences 3- I'm okay with this topic - I could write a couple of paragraphs 4- I'd be happy with this question, but I'm not an expert 5- Extremely confident- I know a lot about this topic A. 1 B. 2 C. 3 D. 4 E. 5 Answer: C,D,E Explanation: A basic response would include Visit us athttps://www.certsgrade.com/pdf/l4m1/

6. - What the 5 Rights of Procurement are: Right Product, In the Right Quantity, Of the Right Quality, At the Right Time, To the Right Place - What this means: this is the basic objective of the procurement department in any organisation- the aim should be to ensure that with all purchases, the 5 rights are achieved. The rights are independent but linked. A good response would include some of the details below: - Price- This means the best / lowest price available CONSISTANT WITH the right quality / quantity – the lowest price isn’t always the best if the quality is bad. The right price for the seller means: what the market will bear, the price that allows you to win business and provides you with a healthy profit for sustaining and growing the business. The right price for the buyer means: what you can afford to pay allowing for the controlling of costs and a reasonable profit margin, value for money, reflects procurement practices / ethical sourcing policies. The right price would also consider Total Cost of Ownership, the Price Iceberg, Whole Life Costing and payback period - Quality – this means the item is 1) Fit for Purpose - the key legal definition of this comes from the UK Sale of Goods Act 1979. Fit for purpose means the purpose the item is COMMONLY used for. 2) Satisfactory Quality - this is defined in the Sale of Goods Act 1979 as working and in good condition and free from minor defects ‘so far as to be reasonably expected’. Quality should be monitored in line with the specification and a buyer may use Quality Control (reactive- weeding out of defective products) and Quality Assurance (proactive- building in quality to systems) to ensure quality is achieved. - Quantity – this is how much of a product is ordered and is linked to time- particularly for JIT / lean manufacturing. Factors for determining the right quantity include; the demand for final product (based on past use / average usage / projected sales figures), inventory levels and policies, market conditions (should a company buy more now if there is evidence the product may become unavailable later?), supply chain factors (minimum order quantities / price incentives for bulk orders). An organisation can use EQQ – economic order quantity which works out a balance between holding stock (which incurs costs) and avoiding a stockout (which is costly in production downtime, loss of reputation). Ties into to MRP systems. - Time- ensuring the product is delivered at the time it is required. This depends on the organisation’s stock holding policy / procedures. An organisation would wish to avoid holding stock if there’s a risk of obsolescence or deterioration but may wish to hold stock to avoid bottlenecks, idle-time and stoppages in production. Timing of deliveries is also important for being able to respond swiftly to customers’ orders and to the changing environment- the right time can therefore be about agility– being responsive to changes in the supply chain and customer demands - Place- getting the product to the right physical location. This includes the accuracy and efficiency of deliveries, ensuring a low environmental impact and low risk. This also takes into consideration logistics and warehousing, risks of goods in transit and the handling of products. (there are a lot of details mentioned here, your essay wouldn't need to include them all- remember you only have 45 minutes to answer- you should aim to pick out maybe 3 points from each of the above, and provide examples where you can) An excellent response may use the following essay structure: Introduction – explain what the 5 rights mean and why this is an important concept in procurement Main body of essay- 5 separate paragraphs on each of the 5 rights. You could use headings for each of your paragraphs. This would help an examiner follow the flow of your essay. Conclusion – here you would sum up your essay. You may also mention that although the 5 Rights of Procurement is considered a standardised matrix for procurement to follow, more recent models include additional Rights such as the Right Relationship with the Supplier. Visit us athttps://www.certsgrade.com/pdf/l4m1/

7. Question: 4 Explain what is meant by added value (5 points). Describe 4 ways the Procurement Department can add value for their organisation (20 points) How confident do you feel answering this question? 1- Not confident at all 2- I don't know the topic well - I could write a couple of sentences 3- I'm okay with this topic - I could write a couple of paragraphs 4- I'd be happy with this question, but I'm not an expert 5- Extremely confident- I know a lot about this topic A. 1 B. 2 C. 3 D. 4 E. 5 Answer: C,D,E Explanation: A basic response would include: - Definition of added value: the economic enhancement given to products or services before offering them to customers. Examples may include a product which has additional features at no additional cost to the customer or the provision of an extended warrantee. - Description of four of the following with examples and explanations: providing better customer service levels, risk management, cost control and reduction, relationship management, reputation management, innovation, use of technology, streamlining processes, improving specifications, increasing sustainability, improving quality, ordering processes such as bulk ordering, inventory management, improving the product from the customer’s perspective (e.g. packaging, exclusivity) A good response may include: - There are different ways of looking at ‘added value’ - Michael Porter looks at this from a customer perspective - ‘added value’ refers to the addition of greater value (either by reducing the cost to produce it, or by adding something that customers are willing to pay more for). These could be; marketing / design, customer service, maintenance, delivery etc. - From an accounting perspective ‘added value’ is seen in purely monetary terms – the total revenue minus total cost of all activities undertaken to develop and market the product. - This part of the question is only worth 5 points so don’t spend too long on this. The bulk of your essay should focus on describing 4 methods for adding value. I’ve picked these four but your essay could describe 4 completely different ones. This is a very open question so a lot of answers would be considered ‘right’. - Improving Specifications- procurement can add value firstly by ensuring all critical items are procured against a specification, and secondly by improving and regularly updating those specifications. For example, the procurement department might be responsible for procuring light-bulbs for an office. Having an effective specification for this purchase (lightbulbs must meet X safety standard and Y environmental standard) would result in less maverick buying for the organisation and the procurement of a better-quality product. Furthermore, regularly updating specifications ensures that purchases are made against current safety standards and regulations (e.g. the use of low-energy lightbulbs). If Visit us athttps://www.certsgrade.com/pdf/l4m1/

8. procurement don’t update specifications, then there is a risk that items are bought that don’t meet the correct standards. Added value in this regard could also therefore be considered the removal of risks of procuring the wrong item. - Stream-lining Processes – Procurement can add value by stream-lining processes such as requisitions and POs. This reduces the time it takes to procure an item, thus saving the company money. Another process that could be streamlined is the re-ordering process of regularly bought items. This could be automated when the stock levels reach a certain level. For example if an organisation requires its staff to wear PPE, an automatic request could be made once there are only 50 face masks left. - Managing Supplier Relationships- having strong, positive relationships with suppliers is a source of added value as it means suppliers value you as a buyer and are therefore more likely to help in situations which are adversely affecting business. For example, if a manufacturer puts an order in for 300 items with their supplier but then realises that they have made an error in the amount, if there is a strong relationship the supplier may allow the buyer to amend the order after the fact. If there is a poor relationship, the supplier may not be as flexible. The flexibility in the supply chain is therefore a source of added value. - Improving Quality / Innovation – this involves adding value from the customer’s perspective. E.g. a customer may choose to purchase a phone that has a longer battery life than others. Procurement’s role in this may be in completing a Value Engineering exercise or procuring higher quality components or materials at the same price. An excellent response: - The question asks specifically to name 4 ways of adding value. You therefore won’t get any additional points if you talk about 5 or 6, even though it may be tempting. Instead, focus your response on providing more information on the 4 you have chosen and bulking out your answer with examples. This demonstrates to the examiner that you fully understand the topic AND that you can apply the theory to real situations. - You could use real-life examples from your own organisation/ experience or you could give a hypothetical situation such as a cake manufacturer. You could talk through how the procurement department at the cake manufacturer can add value by doing the four things in your essay: by amending the specification so the cakes are more tasty, by streamlining the process for ordering flour, by managing the relationship with the company that fixes the machines when they break down, and by introducing innovation such as using an e-procurement system to source raw materials and the benefits that these will bring to the organisation. Question: 5 Bob is a procurement manager at ABC Ltd. He has been asked to ensure all future purchases achieve ‘value for money’ for the organisation. What is meant by ‘value for money’? (5 points). Describe 4 techniques that Bob could use to achieve this (20 points) How confident do you feel answering this question? 1- Not confident at all 2- I don't know the topic well - I could write a couple of sentences 3- I'm okay with this topic - I could write a couple of paragraphs 4- I'd be happy with this question, but I'm not an expert 5- Extremely confident- I know a lot about this topic A. 1 B. 2 C. 3 Visit us athttps://www.certsgrade.com/pdf/l4m1/

9. D. 4 E. 5 Answer: C,D,E Explanation: A basic response would include: 1) A definition of Value for Money: ensuring a purchase is cost effective. This may be that the purchase achieves the 5 Rights of Procurement or that the purchase achieves the 4Es: Economy, Efficiency, Effectiveness and Equity. 2) 4 techniques Bob can use to achieve VFM: pick 4 from the list below and explain each providing examples: complete a value analysis to eliminate non-essential features, minimise variety/ consolidate demand, avoid over specification, pro-active sourcing, whole life costing methodologies, eliminate / reduce inventory, use electronic systems, international sourcing A good response would include: - The first part of the question is worth 5 marks so you shouldn’t spend too long on this. You can make five points or have 5 short sentences describing VFM. Some other things you could mention include: - Value for Money is an important strategic objective for most organisations but particularly in the public sector. This is because the public sector is financed by public money (taxes), so they must demonstrate that the organisation is using this money wisely. - VFM could be analysed by using a Cost Effectiveness Model or Return on Investment. - Value can often be hard to quantify, particularly in the service industry. E.g. in customer service it can be difficult to quantify the value of having knowledgeable and polite employees delivering the service. After your definition you should then discuss 4 of the techniques – ensuring this relates back to the question and to Bob. A good rule of thumb to ensure you’re not going off topic, is to ensure you mention Bob at least once per paragraph. - Value Engineering – this is looking at the components of a product and evaluating the value of each component individually. You can then eliminate any components that do not add value to the end product. To do this Bob would choose a product to review and determine whether any parts of this can be omitted (thus saving the company money) or could be replaced by components that are of a higher quality at the same price (thus providing added value to the customer). For example, Bob could complete a Value Engineering exercise on the new mobile phone prototype ABC plan to release next year. His findings may discover a way to provide a higher quality camera at no additional cost or that some components don’t add value and can be eliminated. - Consolidate demand- Bob can achieve value for money by consolidating demand at ABC ltd. This would mean rather than each individual person/ department ordering what they want when they need it, Bob creates a centralised process for ordering items in bulk for the departments to share. For example, if each department require stationary to be ordered, Bob can consolidate this demand and create one big order each quarter. This will likely result in cost savings for ABC as suppliers often offer discounts for large orders. Moreover, consolidating demand will allow for saving in time (one person does the task once, rather than lots of people doing the same task and duplicating work). - International sourcing – Bob may find there is value for money in changing suppliers and looking at international sourcing. Often other countries outside of the UK can offer the same products at a lower cost. An example of this is manufactured goods from China. By looking at international supply chains, Bob may be able to make cost-savings for ABC. He should be sure that when using this technique there is no compromise on quality. Visit us athttps://www.certsgrade.com/pdf/l4m1/

10. - Whole Life Costing methodology- this is a technique Bob can use for procuring capital expenditure items for ABC. This involves looking at the costs of the item throughout its lifecycle and not just the initial purchase price. For example, if Bob needs to buy a new delivery truck he should consider not only the price of the truck, but also the costs of insurance for the truck, how expensive it is to buy replacement parts such as tyres and the cost of disposing of the truck once it reaches the end of its life. By considering these factors Bob will ensure that he buys the truck that represents the best value for money long term. An excellent response may also mention - The ‘academic’ definition of Value for Money is ‘the optimum combination of whole life cost and the quality necessary to meet the customer’s requirement’ (this is a direct quote from the study guide) - You should include a short conclusion paragraph after you have described the 4 techniques, linking this back to the question. The question specifically asks about ensuring value for money for ‘all future purchases'. Your conclusion could therefore mention something like ‘Bob should ensure he uses these four techniques for all items he and his team procures in the future as this will ensure ABC Ltd are always achieving value for money, and thus remain competitive in the marketplace’. Visit us athttps://www.certsgrade.com/pdf/l4m1/

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