CIPS Exam Report for Learner Community:

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1 CIPS Exam Report for Learner Community: Qualification: Diploma in Procurement and Supply Unit: Unit D2: Business Needs in Procurement and Supply Exam series: November 2014 Question 1 Learning Outcome 1 Q1(a) Explain the difference between the terms 'cost' and 'price' (5 marks). This straightforward part of this question sought an explanation of the difference between the terms 'cost' and 'price'. Answers should have broadly stated that cost is the money paid out by an organisation to acquire the goods or services that it requires, including materials, labour, and overheads; whereas price is what the organisation charges its customers, and so will normally include an element of profit. Therefore, the price charged by an organisation will normally be higher that its costs, unless it is selling its product or service as a loss-leader or at a price which deliberately is set to only cover costs. Essentially, therefore, cost is an input, and price is an output. Or, in the old cliché, a cost is a fact; a price is an opinion. Up to five marks were available for this part of this question; but generally, this relatively straightforward and introductory part of this question was not answered very well. Many responses did not explain the difference clearly, and/or included various inaccuracies and irrelevant content, such as whole life costing. Q1(b) Describe FIVE sources of data that a buyer might consult to obtain information about the market prices of inputs (20 marks). This part of this question sought a description of any five sources of data that a buyer might consult to obtain information about the market prices of inputs. Responses should have given a description of any five such sources; and there were very many to choose from. Markers accepted all feasible answers. Examples of correct answers included: direct communication with suppliers; price enquiries; Requests for Quotations; trade exhibitions; conferences; meet the Buyer events; online supplier/buyer forums; the buyer's own database of market data, including past records of prices charged by suppliers, market price changes, price trends analyses, and spend analyses; marketing communications sent out by suppliers; advertising literature; brochures; catalogues; visits from suppliers' sales representatives; suppliers websites; price lists; online market exchanges; auction sites; advisory and information NOVEMBER 2014 D2 EXAM REPORT - LEARNER COMMUNITY 1/6

2 services; CIPS and its publications; informal networking with colleagues and with other purchasing professionals; events such as CIPS branch meetings and training courses; the financial or trade Press; published indices; published statistical surveys; price lists; and price comparison websites. Generally, this part of this question was answered quite well; often much better than was part (a) of this question. Question 2 Learning Outcome 2 Q2 (a) Explain THREE advantages of using Key Performance Indicators (KPIs) in a contract. (15 marks) This part of this question sought an explanation of any three advantages of using Key Performance Indicators (KPIs) in a contract. There were many to choose from; and Markers accepted all feasible answers. Examples of correct answers included, but were not limited to: helps to ensure that contract performance is linked to the organisation s overall objectives; brings a quantitative and therefore measurable tool to contract management; suppliers are motivated to achieve performance; clarifies and focuses on key results areas in the contract; allows comparison of performance over time; highlights trends of improvement or deterioration; can support collaborative relationships between buyer and supplier; may help to identify the best and worst performing suppliers; can provide feedback, for use in continuous improvement. All of these advantages, and all other feasible and relevant advantages, were accepted, and were awarded marks. Up to five marks were awarded for each relevant advantage explained; with higher marks being awarded for more comprehensive explanations of those advantages. This part of this question was generally answered quite well, with many candidates giving good responses. Some responses gave too much unnecessary detail about the theory around KPIs, rather than explaining the advantages of using them; and some responses struggled to identify three clearly separate advantages, so that there was duplication and overlap within the response. Q2(b) Explain TWO potential information security risks that should be addressed in the specification for a new computer system (10 marks). This part of this question sought an explanation of any two potential information security risks that should be addressed in the specification for a new computer system. This part of this question was also generally answered quite well, with many candidates giving good responses. There were many to choose from; and Markers accepted all feasible answers. Examples of correct answers included, but were not limited to: unauthorised hacking; lack of adequate firewalls; viruses; poor access control for internal users; theft of confidential data; NOVEMBER 2014 D2 EXAM REPORT - LEARNER COMMUNITY 2/6

3 theft of Intellectual Property; degradation of data; poor password security; poor backup arrangements; and poor arrangements for transfer of data. These and all other relevant information security risks were given credit by Markers; but risks that were not 'information security' risks were not relevant to this part of this question and so could not attract marks. Candidates were not expected to be able to demonstrate any detailed technical knowledge of IT systems; nor were they expected to develop the detail of the specification itself. Up to five marks were awarded for each relevant risk explained, with higher marks being awarded for the more detailed explanations. Some answers were far too short for a ten-mark part of a question. And a surprising number of candidates gave more than the two risks sought. This doesn t lose any marks - Markers stopped marking after the second one - but it cannot gain any marks, and it does waste valuable exam time. Question 3 Learning Outcome 3 Q3(a) Describe, with an example, the following price arrangements in commercial agreements: (i) Fixed price arrangements (ii) Incentive price arrangements (iii) Cost-plus arrangements. Responses to this part of this question should both have described each of the listed three types of pricing arrangement, and given an example of each one. Areas that responses should have covered were broadly as follows: (i) Fixed price agreements are where absolutely fixed and firm and unchangeable prices or fees are agreed in advance; or possibly where prices are fixed to some specified index; (ii) Incentivise price arrangements are where bonus payments are agreed in advance, based on the supplier s achievement of specific performance indicators, perhaps especially those aimed at making cost reductions or achieving high measurable performance levels; or where the commercial agreement includes a formula to share gains between buyer and supplier - sometimes called gainshare ; (iii) Cost-plus arrangements are where the buyer reimburse the supplier with all of its allocable costs incurred whilst performing the contract, with an addition always of an agreed percentage for the supplier s profit ; and/or where the full costs are supplemented by a supplier s management fee. This pricing arrangement may be used in particular where the supplier's costs cannot easily be estimated e.g. for some Research and Development contracts; but there is no incentive on the supplier to reduce their costs with this arrangement, which may make it less attractive to the buyer. Both parties may then share the cost savings. This pricing arrangement may be used particularly where there is plenty of scope for cost reductions and performance improvements by the supplier. Good responses to this part of this question fully explained each of the listed three types of pricing arrangement, and gave an example of each one: all possible relevant examples received credit from Markers. There were up to two NOVEMBER 2014 D2 EXAM REPORT - LEARNER COMMUNITY 3/6

4 marks available for each description; and a further one mark available for each example, up to a total of nine marks. But there were very few wholly satisfactory responses. The large majority of responses did not clearly describe the three pricing arrangements: most gave only very basic descriptions of the three types, often with many errors and inaccuracies. And only a few responses included a relevant example of each of the three types. Plenty of scope was given by Markers for differences in the wording used in responses, because the terminology of pricing arrangements is not consistent across the world, or even across different sectors in the UK; but still a significant number of answers were way off the track of the question, and/or were of insufficient length and depth to gain high marks. Q3(b) Explain TWO advantages of fixed price purchase arrangements for a purchasing organisation (8 marks). Generally, this part of this question was answered quite well; and was generally better than part (a) of this question. Most candidates were able to explain two convincing advantages of fixed price purchase arrangements, albeit often at a fairly basic level. Candidates often failed to give much detail, and therefore did not gain all potential marks. All relevant examples of advantages of fixed price purchase arrangements for a purchasing organisation were given credit by Markers. Correct answers included: reduced financial risk, because cost commitments are known in advance; the supplier bears the risk of any price fluctuations; cashflow management is clarified; may motivate the supplier to perform, as there is a strong incentive to achieve cost savings because savings are kept by the supplier; administratively simple, as there is no need to monitor or audit cost performance; budgetary certainty. Q3(c) Explain TWO elements that may cause price fluctuations in a cost plus purchase arrangement (8 marks). This part of this question sought an explanation of any two elements that may cause price fluctuations in a cost plus purchase arrangement. In contrast to the other parts of this Question, this part of this question was quite often answered quite well. There was a vast array of possible elements to from which to choose, and Markers accepted all feasible answers. Examples of correct answers included, but were not limited to: underestimated costs; underestimated budgets; wage increases; inflation; commodity price increases; overruns; exchange-rate fluctuations; and changes to the specification. These and all other relevant reasons for price fluctuations/increases were given credit. Overall, Question 3 was often the lowest-scoring question on exam papers from this exam session; although this was often compensated for, in many instances, by much higher marks gained for the other questions on the paper, especially for Questions 1 and 4. NOVEMBER 2014 D2 EXAM REPORT - LEARNER COMMUNITY 4/6

5 Question 4 Learning Outcome 4 Q4(a) Explain the meaning of the term make/do or buy decision for goods or services (5 marks). This small part of this question was answered well by the great majority of candidates, and maximum scores of all five marks were quite common. Correct responses stated that an organisation might make the goods (or develop the services) that it needs in-house, procuring only the raw materials it needs for the products it is making; with the value of the final goods/services thereby being created almost entirely in-house. Or, the organisation might buy in the goods/services that it needs from external suppliers or sub-contractors, and then the value of the finished product will have been added by the external suppliers or subcontractors. All appropriate variations and additions to this explanation were also accepted by Markers. Q4(b) Describe FIVE factors that an organisation may take into account when making a make/do or buy decision for goods or services. (20 marks). Most responses to this part of this Question were well structured, and clearly set out five different factors that an organisation may take into account when deciding whether to make goods/services itself, or whether to buy them in from a supplier. Most of the responses demonstrated good knowledge of these factors, identifying them well, and giving good, relevant descriptions, of appropriate length to get high marks. Strong answers fully described potential factors, such as the loss of expertise and internal control, and poor performance or reputational issues if the outsourced supplier then fails to deliver effectively. Responses often included good discussions of market issues, and issues around the availability of competent suppliers. Responses typically showed a good understanding of theory; but many responses also showed good understanding and application of the theory, with examples and evidence included from candidates own experiences. There were some exceptionally good responses to this question. All valid responses were awarded marks, with up to four marks awarded for each factor described. Other factors that were typically addressed in responses were: whether the goods or services are strategically important, or core, to the organisation; how the costs of producing in-house stack up against buying from a supplier; the availability of appropriate competencies in-house and in the outside marketplace; the available capacity inhouse and in the outside marketplace; the risks involved in devolving production activities to the external supply chain, such as risks to confidential information and to intellectual property; and the effects on the workforce, such as the possibility of redundancies and industrial disputes. These factors, and all other relevant factors and examples, received credit NOVEMBER 2014 D2 EXAM REPORT - LEARNER COMMUNITY 5/6

6 from Markers. Up to four marks were awarded for each of the factors described, with higher marks being awarded for more accurate and more detailed descriptions. Oddly, a few responses gave fewer than five factors, thereby limiting their potential maximum score; and also a few responses gave more than five factors, in which case markers only assessed the first five factors described. Both of these are clear examples of poor exam technique. Overall, Question 4 was answered very well by the majority of candidates, and good total marks here often compensated for lower marks elsewhere - particularly for Question Three. Scores for Question 4 also often brought the total score for the paper as a whole up to a pass or merit level. NOVEMBER 2014 D2 EXAM REPORT - LEARNER COMMUNITY 6/6