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| Section | Objectives |
|---|---|
| Topic 1: External Business Environment Influences | - Political, legal, and regulatory environment
|
| Topic 2: Supply Markets and Risk | - Supply market dynamics
|
| Topic 3: Ethics and Sustainability in Procurement | - Ethical procurement practices
|
| Topic 4: Scope of Procurement and Supply Function | - Procurement cycle overview
|
| Topic 5: Stakeholders and Governance | - Internal and external stakeholders
|
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NEW QUESTION # 18
Describe the main differences between the three economic sectors: public, private and third. Your answer may make reference to the following: funding, ownership, shares, objectives and administration (25 marks)
Answer:
Explanation:
See the solution in Explanation part below.
Explanation:
How to approach this question
- Sometimes CIPS give you a steer on how to answer the question. My advice is to follow it. The question says you MAY make reference to the following, but I'd use those hints as a guide for content- a paragraph on each and you're done!
- When you've got a 'may make reference to' hint - this means you can completely ignore it and do your own thing and bring in your own ideas. May means it's optional, so you wouldn't be penalised for this. However, you have to consider the examiner's mark scheme- it will detail options of stuff you can write for funding, ownership etc. Then there will be a line at the bottom saying something like 'accept other options such as x and y'. This leaves it up to the examiner to decide whether what you've said is relevant. I'd personally not leave it up to chance you get a lenient examiner. If you write what's definitely going to be on their mark scheme, you're more likely to get more points.
Example Essay
The modern economy is a complex tapestry of various sectors, each with its own distinct characteristics and functions. The three prominent sectors are the public sector, the private sector, and the third sector. These sectors differ significantly in terms of their funding mechanisms, ownership structures, objectives, the concept of shares, and their administration.
Firstly, the public sector is predominantly funded by the government through taxation, grants, and other forms of public revenue. Its very existence hinges on the provision of essential services and the fulfilment of societal needs. These organizations are owned by the government, be it at the federal, state, or local level. Unlike the private sector, the concept of shares doesn't apply in the public sector. Instead, the government allocates budgets to various departments and agencies for public services and projects. The primary objectives of the public sector revolve around the welfare of the citizens, including the provision ofeducation, healthcare, defence, and infrastructure. It is characterized by bureaucratic administration, with decision-making processes subject to governmental regulations and oversight. A prime example is public schools and healthcare systems, which are funded and operated by the government with the primary objective of ensuring universal access to education and healthcare services.
In contrast, the private sector operates on a starkly different paradigm. It is primarily funded by private capital, investment, and profit-seeking activities. Private individuals and corporations own these entities, with ownership shares often represented by stocks. Shareholders invest capital in exchange for ownership stakes and the potential for dividends. The central objective in the private sector is profit maximization, driven by competition in the market. Companies in the private sector are administered by management teams and boards of directors, with decisions guided by market forces. Apple and ExxonMobil are examples of private sector entities, privately owned and publicly traded, with profit motives at their core. Shareholders invest in these companies with the expectation of financial returns.
Lastly, the third sector, often referred to as the nonprofit or voluntary sector, represents a unique economic sphere. It relies on a combination of funding sources, including donations, grants, and earned income, but not taxation. Third sector organizations are not owned by individuals or shareholders; instead, they are governed by boards of directors or trustees. Unlike the private sectors, shares are not applicable in the third sector.
These organizations do not seek to distribute profits to owners. The primary objective of the third sector is to serve a social or community purpose, such as addressing societal issues, promoting social change, and providing services that benefit the public. Administration in this sector is overseen by non-profit boards, and it heavily relies on volunteers, philanthropy, and community engagement. For example, the Red Cross operates with the objective of providing humanitarian aid and disaster relief, relying on donations and volunteers to fulfil its mission. Any profits that are made are reinvested into the organisation to further its mission.
In conclusion, the public, private, and third sectors represent diverse economic domains, each with its own funding mechanisms, ownership structures, objectives, and administrative models. These sectors play essential and complementary roles in society, contributing to economic development, public welfare, and social progress. Together, they form the foundation of a balanced and dynamic economic landscape.
Tutor Notes
- I've structured this essay with a paragraph on each sector, but you could have done a paragraph on each theme, thus having 5 paragraphs instead of 3. Either approach works.
- You've got 5 things and 3 sectors, that equals 15 marks. If you give an example of each and a strong intro and conclusion, that's full marks.
- See LO 4.1 p. 203 - there's a cute table with this information on.
NEW QUESTION # 19
Explain FIVE differences between capital expenditure and operational expenditure categories of spend for an organisation.
(25 marks)
Answer:
Explanation:
See the solution in Explanation part below.
Explanation:
When discussingcapital expenditure (CapEx) and operational expenditure (OpEx)in the context of procurement and supply, it is essential to understand how they impact an organization's financial planning, decision-making, and procurement strategy. Below arefive key differencesbetween CapEx and OpEx:
1. Definition and Nature of Spend
* Capital Expenditure (CapEx):Refers to investments made by a company to acquire, upgrade, or maintain physical assets such as property, machinery, or equipment. These are typically large, one-time purchases that provide long-term benefits.
* Operational Expenditure (OpEx):Involves day-to-day expenses required to run the business, such as salaries, rent, utilities, and consumables.These costs are necessary for ongoing operations.
2. Accounting Treatment
* CapEx:Considered a long-term investment, it is capitalized and recorded as an asset on the balance sheet. Depreciation or amortization is applied over the useful life of the asset.
* OpEx:Fully expensed in the profit and loss statement in the accounting period in which it is incurred. It directly impacts the organization's profitability in the short term.
3. Budgeting and Approval Process
* CapEx:Requires substantial financial planning, detailed justification, and approval from senior management due to its high-cost implications.It often involves long-term financial commitment.
* OpEx:Generally included in the organization's operating budget and does not require extensive approval processes, as it consists of routine expenses necessary for daily business functions.
4. Impact on Cash Flow and Financial Planning
* CapEx:Affects cash flow significantly as it requires large upfront payments. Organizations often finance CapEx through loans, leasing, or long-term financial strategies.
* OpEx:Represents smaller, recurring costs that are easier to manage and predict within the financial year, allowing for more flexibility in cash flow management.
5. Examples of Procurement and Supply Considerations
* CapEx Examples:Purchasing manufacturing equipment, acquiring new office buildings, upgrading IT infrastructure (e.g., servers, data centers).
* OpEx Examples:Office supplies, utility bills, employee salaries, maintenance and repair costs, software subscriptions.
Conclusion
Understanding the distinction betweencapital expenditure and operational expenditureis essential for procurement and supply professionals to make informed financial decisions, align with corporate strategy, and ensure efficient resource allocation. Procurement teams must consider factors such as cost-benefit analysis, funding sources, and long-term value when determining the best approach for an organization's spending strategy.
NEW QUESTION # 20
Mo is the new Head of Procurement at Manufacturer X. Manufacturer X is a small organisation which creates bespoke robots for clients. Their supply chain is complex, sourcing many components from various suppliers. Mo has joined the company at a pivotal time of growth. The company wishes to expand the procurement department and formalise its policies. Discuss 5 areas that Mo should consider when drafting the department's policies and manuals (25 points).
Answer:
Explanation:
See the solution in Explanation part below
Explanation:
How to approach this question
- Remember as you're preparing an essay plan that this is a case study question, meaning everything has to relate back to Mo and Manufacturer X. So for the 5 areas- think about how this would be applicable for a robotics manufacturer. CIPS don't expect you to know anything about robotics so if you talk about KPIs for suppliers- just make them up- as long as they sound right-ish that's all that matters.
- Areas you could talk about include: competition, ethics, KPIs, quality, supplier appraisal, supplier evaluation, sustainability, transparency Example Essay Mo, stepping into the role of Head of Procurement at Manufacturer X during a pivotal period of growth, faces the task of expanding the department and formalizing its policies. In this intricate landscape of a small organization creating bespoke robots, five crucial areas demand Mo's careful consideration in the drafting of departmental policies and manuals: competition, ethics, quality, supplier evaluation, and sustainability.
Firstly, competition. As Manufacturer X navigates growth, Mo must establish transparent guidelines for competitive bidding processes. It is imperative to ensure fairness in supplier selection and implement strategies for cost competitiveness without compromising quality. Encouraging innovation and collaboration with suppliers becomes a strategic approach to gain a competitive edge in the market. Mo should be careful that his policies do not favour any suppliers over others and that consideration is given to allowing SMEs to bid for work.
Secondly, Ethics. Mo needs to develop an explicit code of ethics guiding procurement professionals in their interactions. This should emphasize honesty, integrity, and fair treatment. Additionally, establishing due diligence procedures to ensure suppliers adhere to ethical business practices, especially concerning labour and environmental standards is important. Moreover, whistleblower protection mechanisms should be put in place to encourage the reporting of ethical concerns without fear of reprisal.
Thirdly, Quality considerations. Given the bespoke nature of the robotics industry and the necessity of maintaining high standards for customer satisfaction, Mo must define and communicate stringent quality requirements to suppliers, emphasizing adherence to specifications and standards. The establishment of robust inspection and testing procedures at various stages of the supply chain is crucial, ensuring consistent component quality. Developing contingency plans and protocols for addressing quality issues promptly, including collaboration with suppliers for continuous improvement, should be integrated.
With the organization's growth, a systematic approach to supplier evaluation becomes paramount. Mo needs to develop a comprehensive evaluation framework, including criteria such as financial stability, reliability, and past performance. Implementing a supplier scorecard system is essential for tracking and assessing supplier performance over time. Moreover, fostering strategic relationships with key suppliers to promote collaboration, innovation, and long-term partnerships becomes a strategic imperative.
Lastly, Mo should consider sustainability, in particular environmental awareness and the promotion of sustainable practices into the supply chain for long-term viability. Developing sustainability criteria for supplier selection, considering factors such as environmental impact, social responsibility, and ethical sourcing, is imperative. Encouraging suppliers to adopt environmentally friendly practices and certifications, such as ISO14001 or Fair Trade, becomes crucial. The integration of sustainability goals into procurement key performance indicators (KPIs) is essential for tracking progress and demonstrating the organization's commitment to corporate responsibility.
In conclusion, Mo's strategic focus on competition, ethics, quality, supplier evaluation, and sustainability is pivotal in laying the foundation for a procurement department that not only supports Manufacturer X's growth, but also aligns with its values and industry standards. This approach positions the organization for success in the dynamic landscape of bespoke robot manufacturing.
Tutor Notes
- This question is taken from P. 146 - note the question is on policies not strategy. These are slightly different concepts, but they do overlap. Policies are black and white- we do this and we don't do that. Strategies are about what the company wants to achieve. They're future orientated, where as a policy is about what we do now. So a policy may include sustainability, but strategy may talk about reducing pollution.
- CIPS could also ask you to talk about procurement strategies such as achieving cost reductions, environmental issues etc. These are also on p.146
NEW QUESTION # 21
Describe the main characteristics of, and differences between, procuring goods, services and construction works (25 points)
Answer:
Explanation:
See the solution inExplanation partbelow.
Explanation:
- there are a lot of components to this question so I would take a good 5 minutes to write out some bullet points on the characteristics of each one, and on some differences. Then from your notes make this into an essay. The mark scheme isn't 100% clear on how many characteristics and differences you need to name, so try and keep an equal split between the two areas. You would probably need 2-3 characteristics of each, and 3 differences for a good score.
- 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
1) goods are not usually outsourced and services can be.
2) Complexity of the supply chain (goods and construction may have a complex supply chains, but service contracts usually only involve 2 parties).
3) 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.
Example Essay
Introduction:
Procurement is a multifaceted field, and understanding the nuances between procuring goods, services, and construction works is pivotal for effective management. This essay explores the main characteristics that differentiate these categories.
Tangible / Intangible:
Goods are tangible items that can be physically seen and touched. For instance, raw materials like wheat and sugar in a manufacturing organization are tangible goods. On the other hand, services are intangible-though the results can be observed, the service itself cannot be touched. An example is a cleaning contract for a factory; while the effects of the cleaning are visible, the service itself remains intangible. Construction is usually a mixture of tangible and intangible procurement; the tangible is the construction materials such as bricks and windows, and the intangible aspect is the labour to complete the project.
Heterogeneous / Homogeneous:
Goods are generally homogeneous, meaning they are always the same. For example, steel purchased for manufacturing purposes will always be the same. In contrast, services areheterogeneous, varying each time they are rendered. Customer service, for instance, is inherently different each time due to the dynamic nature of customer interactions. Construction could be either heterogeneous or homogeneous depending on the project - is it a one off unique building, or is it a large housing estate of same-build properties?
Transfer of Ownership:
When goods are procured, there is a transfer of ownership. The product becomes the property of the buyer upon delivery and payment. In contrast, services do not involve a transfer of ownership as there is no physical entity to transfer. In construction the transfer of ownership is extremely complex and varies depending on the project. Usually the buyer will retain ownership of the land throughout the project, but on some occasions the construction company may take ownership for insurance purposes.
Storable (Separable/ Inseparable):
Goods are storable, allowing for purchase on one day and use on another. For example a factory can buy in plastic to be used to manufacture toys and this is stored in inventory until the time comes to make the toys.
However, services are consumed at the point of purchase, making them inseparable. The service is bought and utilized simultaneously. Services cannot be stored. This is the same for construction.
Ability to Outsource:
Goods are rarely outsourced, as they are typically purchased directly from suppliers. Services, on the other hand, can be easily outsourced-examples include outsourcing finance, cleaning, or security services.
Construction works are commonly outsourced, with external companies hired to execute projects.
Complexity of the Supply Chain:
Service contracts often involve a simple two-party relationship between the buyer and the supplier. Goods and construction, however, may have complex supply chains. For example, procuring a pen involves a supply chain with various steps, including the raw material supplier, manufacturer, and possibly a wholesaler.
Construction works often feature a tiered supply chain with subcontractors playing crucial roles.
Construction as a Hybrid:
Construction procurement represents a hybrid, incorporating elements of both goods and services. It involves hiring a service, such as a bricklayer for laying bricks, while also procuring the tangible goods-bricks.
Separating goods from services in construction is challenging, as they are often intertwined, and both aspects are paid for simultaneously.
Conclusion:
In conclusion, distinguishing between the procurement of goods, services, and construction works is essential for effective supply chain management. The tangible or intangible nature, heterogeneity, transfer of ownership, storability, outsourcing potential, and supply chain complexities offer a comprehensive framework for understanding the unique characteristics of each category. Recognizing these distinctions empowers organizations to tailor their procurement strategies to the specific challenges and dynamics associated with goods, services, and construction works.
Tutor Notes
- What a characteristic is can also be a difference. So for example you can say tangible is a characteristic of goods but tangibility is also the main difference between goods and services. So don't worry too much about which order to write stuff in, or doing clear sections for this type of essay. It all comes out in the wash.
- 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
- Legislation - Goods = Sale of Goods Act, Construction - CDM Regulations 2015. Construction is much more heavily regulated than services or goods. Note CDM regulations isn't part of CIPS. It's occasionally referenced in various modules but you don't have to really know what it is. Just know it's the main legislation governing the construction industry. Construction - Construction Design and Management Regulations 2015 (hse.gov.uk)
- Study guide LO 1.3.1 p. 40, but mainly p. 52 for services. NOTE the title of this learning outcome includes construction and it is hardly mentioned in the study guide. Most of the above information on construction comes from my own knowledge rather than the book.
NEW QUESTION # 22
Explain the following terms: outsourced procurement, shared service unit (SSU) and consortium procurement.
What are the advantages and disadvantages of each approach to procurement? (25 points)
Answer:
Explanation:
See the solution inExplanation partbelow.
Explanation:
How to approach this question:
- There are 3 terms and an advantage and disadvantage for each you need to talk about. So that's 9 things. Out of 25 points you can see you'll probably only get 1-2 points for each aspect of the question. That shows you the level of detail you need to include - not that much!
- In terms of structure feel free to use headings and bullet points for this one Example Essay Outsourced procurement, shared service units (SSUs), and consortium procurement are distinct approaches to managing procurement activities within organizations. Each method carries its own set of advantages and disadvantages, catering to different organizational needs and circumstances.
Outsourced Procurement: Outsourced procurement involves engaging a procurement consultant or an external organization to provide advice or handle the entire procurement process on behalf of the company. The advantages of outsourced procurement are that it frees up internal resources, allowing them to focus on other tasks. The expertise and skills brought by external consultants can also fill gaps in the organization's capabilities. Moreover, this approach is flexible, adapting well to irregular procurement needs. However, drawbacks include a potential loss of control, higher costs, the need for an additional management layer, and the risk of losing intellectual property (IP).
Shared Service Unit (SSU): A Shared Service Unit is an internal procurement support function within an organization that various divisions can access for assistance, resembling the outsourcing concept but within the organizational structure. The advantages of SSUs lie in potential cost savings, the ability to aggregate demand, and the establishment of common standards and processes across the company. The expertise utilized is internal, providing a sense of familiarity. The disadvantage is that measuring the success of an SSU can be challenging, and there is a risk of stifling innovation. The unit may also be perceived as remote from end users, and procurement processes might be slower due to serving multiple departments.
Consortium Procurement: Consortium procurement involves a collective effort where separate organizations join forces to purchase goods, thereby increasing their bargaining power. The advantages of this approach are in the aggregated demand, resulting in more economical purchases. Pooling knowledge and expertise within the consortium enhances the collective capabilities of its members, providing a sense of safety in numbers.
However, disadvantages include a potential loss of individual organizational power, prolonged decision-making processes within the consortium, challenges in responding quickly to demands, and the potential hindrance to small and medium-sized enterprises (SMEs) competing if demand is aggregated.
In conclusion, organizations must carefully consider their specific needs, priorities, and the nature of their procurement requirements when choosing between outsourced procurement, SSUs, or consortium procurement. Each approach offers unique benefits and challenges, and the decision-making process should align with the organization's overall goals and strategies.
Tutor Notes:
- I've named lots of advantages and disadvantages for each of the models. 1-2 advantages and disadvantages of each is all you need to secure you the marks. Remember you only have 35 minutes to write this. A danger with this type of question is spending too long on one aspect of the question and running out of time to answer the rest of it.
- A good idea is to pace yourself and give yourself 10 minutes per term (outsourced, SSU and consortium) then 5 minutes at the end to review and edit your response.
- Some further details you may wish to include:
- Outsourced procurement - this is often used when the organisation doesn't have the expertise to procure the item they need. This often happens for complex / technical procurements or highly regulated industries. An example may be a housing provider who runs a block of flats where the lift has just broken down and cannot be fixed. They need to procure a new lift but have no idea how to write a specification for this as they don't have the technical knowledge of how lifts work. Hiring a consultant who is experienced in tendering for lifts, although expensive, may actually save money by reducing the risk of procuring the wrong thing.
- SSU - a Shared Service Unit acts as a support function for the organisation. This is described in Porter's Value Chain- all other departments can call on the SSU when they require assistance. The SSU is responsible for managing its own costs, employs its own resources and may have contractual agreements with other divisions. The main aim of the SSU is to add value. SSUs are common in large organisations where the core activities don't revolve around procurement (such as finance and service industries).
- Consortium - Consortium buying is encouraged in the public sector in order to maximise value for money.
Consortiums can create their own Frameworks. There is a risk that large consortia can abuse their dominant market position.
- LO 3.3 p. 161
NEW QUESTION # 23
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