CIPS Exam Report for Learner Community:

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1 CIPS Exam Report for Learner Community: Qualification: Unit: Exam series: Diploma in procurement and supply D5 - Managing contracts and relationships in P&S July2013 Question 1 Learning Outcome 1 Explain, using examples, the following competitive forces in supply chains: (i) Threat of new entrants to a market (ii) Power of suppliers (iii) Power of buyers (iv) Potential product or service substitutes (v) Competitive rivalry (25marks) 5 marks each is awarded for this question up to a total of 25 marks. Each detailed discussion of the five forces model will attract a total of 4marks with a full 5 marks for providing good or relevant examples from case materials or industry best practice. Pass grade answers are likely to include the following content Threat of New Entry: This force affects the power between companies that operate in a market through the ability of other organisations to enter the market. If it costs little in time or money to enter the market and compete effectively, if there are few economies of scale in place, or if there is little protection for key technologies, then new competitors can quickly enter the market and weaken the position of the companies that are operating in the market. Candidates are required to define Threats of New Entry and be able to identify the Barriers to entry. For instance, if there are strong and durable barriers to entry, then it can be possible for companies to preserve a favourable position and take fair advantage of it. Barriers to entry into a market include; economies of scale, need for large scale finance for high capital investment, product differentiation and high brand loyalty, high advertising spend by competitors, access to established distribution channels or natural resources, Government or legislative barriers. Power of suppliers: Power of suppliers could depend upon the uniqueness of suppliers product or service, their strength and control over their customers as well as the cost of switching from one to another. The fewer the supplier choices organisations that operate in the market have, the more powerful suppliers will generally be. So the power of suppliers tends to be high where; there are a limited number of suppliers (especially with an oligopoly) few substitutes, volume is unimportant to the supplier s business, the product or service is JULY2013_ (D5) 1/5

2 important to the buyer, switching costs to the buyer is high. Buyer power: this refers to the pressure that customers exert on firms that operate in a market to obtain high quality products or services at lower prices. Buyer power increases when there are few buyers and many sellers in the field, or when products or services are not significantly differentiated and can be easily substituted. For suppliers, buyers demands represent costs. This means that the stronger the buyer is, the less profit will generally be made by suppliers, which is why many companies try to develop strategies that reduce the power of buyers. So buyer power is high where; there are a limited number or large in size relative to buying organisations, spend is important to supplier s revenue, products are undifferentiated, and there is a potential for backward integration. A good answer for this aspect of the question can be found on page 45 of the official CIPS course book. Substitutes: substitute products are alternative products that serve the same purpose (e.g. postal services, courier services, fax machines and s in the field of communication) making it easy for buyers to switch to alternative suppliers, and therefore limiting the price that suppliers can charge for their products; see page of the official CIPS course book. Having an idea about the topic can be good for marks to be awarded and not necessarily copying verbatim from text books. Substitutes may refer to viable, alternative choices of products or services that customers can make which meet the same needs as the original product or service that is supplied. An example would be MP3 downloads which meet the same need as CDs, or mobile phones with cameras which satisfy the same need as digital cameras. As with reducing the threat from new competitors, companies can use different strategies to protect their products using trademarks, patents or strong branding to differentiate them from substitute products. Alternative products which serve the same purpose make it easier for buyers to switch to alternative suppliers, for example, postal and courier services or Gari and Couscous. Competitive rivalry: Competitive rivalry exists; companies, organisations or institutions differ from one another in terms of their resources (i.e. the haves and the have not s), capabilities, and core competencies, and the opportunities and threats in their competitive environments and industries. It also is important that companies recognise that competition results in mutual interdependence among companies in the industry as each company tries to establish a sustainable competitive advantage. As companies strive to achieve strategic competitiveness and earn above-average returns, they must recognise that strategies are not implemented in isolation from competitors' actions and responses. This is important because the pattern of competitive rivalry and competitive dynamics in the market(s) in which companies compete affects strategic thinking, competitiveness, capability and profitability. JULY2013_ (D5) 2/5

3 Question 2 Learning Outcome 2 a) Explain the difference between vital and non-vital contract terms. b) Discuss, with examples, implied terms in contract law. (16 marks) (9 marks) Candidates are expected to understand what a vital and non-vital contract terms are. They should be able to demonstrate that, a condition is a vital term of the contract, breach of which may be treated by the innocent party as a substantial failure to perform a basic element of the contractual agreement. This should relate to the understanding of warranty terms as a less important or non-vital term which is incidental to the main purpose of the contract and its breach does not constitute a substantial failure of performance. Pass grade answers are likely to include the following content for Q2a: Usually, each term of a contract can be classified as either a condition or a warranty. A condition is a vital term of the contract, breach of which may be treated by the innocent party as a substantial failure to perform a basic element of the agreement. A warranty is a less important or non-vital term which is incidental to the main purpose of the contract. Breach of a warranty does not constitute a substantial failure of performance. In the case of a breach of condition, the innocent party has a choice of treating the contract as repudiated (or ended) and claiming damages for any loss suffered as an alternative to merely claiming damages for the breach. In the case of a breach of warranty, however, the whole agreement need not collapse/cease/ended but rather; the innocent party may therefore claim damages for the breach, but cannot repudiate/end/terminate the contract. Pass grade answers are likely to include the following content for Q2b: Answers should begin with a definition of implied terms. It is also important to recognise that; common law, statutes, customs also form part of implied terms in contract law. A good understanding and explanation is also helpful. Candidates may also distinguish implied terms from express terms. Most candidates mentioned SOGA (sales of goods Act) and were awarded marks accordingly. It is not relevant explaining the whole content of the SOGA. Other valid answers will gain credit; some students may answer using legal examples from other countries. JULY2013_ (D5) 3/5

4 Question 3 Learning Outcome 3 Explain, using one example for each, the following types of contractual risk: i. Internal risks ii. Market risks iii. Economic risks iv. Legal risks v. Ethical sourcing risks (25 marks) Learning outcome: Candidates are required to explain risks that can impact on performance of a contract and/or a supplier relationship such as internal, market, economic, legal, ethical sourcing and performance base risks. See page 125 to 139 of the official CIPS course book. Pass grade answers are likely to include the following content:- i. Internal risks (Pages 127 and 128 of the Course Book) These are risks from internal factors and features such as systems breakdown, human error and inexperience, malicious internal activity, industrial action, loss of key personnel etc. other areas to consider could include: technology failures, equipment or systems breakdown e.g. through lack of maintenance, incorrect usage or lack of contingency planning; human error and inexperience e.g. lack of training or supervision; malicious activity e.g. fraud, sabotage, theft, data theft or unethical conduct, security risks lack of internal control etc. ii. Market risks: Market risks are those that stem from supplier failure or market failure, such as dominant or specialist/monopolistic suppliers, over-long lead-times, poor schedule compliance, poor quality of output, etc. iii. Economic risks: This stem from poor financial controls internally or other economic failures externally. Economic risks could therefore include financial penalties being incurred for whatever reasons, inadequate investment appraisals, boom and bust cycles in economies, exchange rate fluctuations, collapse of banks and banking systems, changes in financial regulations, and devaluation of currencies. iv. Legal risks: this can stem from poor compliance management, poor contract management, poor tendering and contract award processes, poor change control, and several other legal aspects v. Ethical sourcing risks: These risks include unethical behaviours at any point in the extended supply chain, failure to maintain ethical standards over time, unauthorised activities and changes to sources and subcontractors, unacceptable labour practices, damage to reputation with stakeholders and customers in the event of a failure to uphold the new ethical sourcing standards, etc. Candidates are awarded up to five marks for each element of the question answered correctly; with up to four marks for explanation of the risk itself, and up to a further one mark for an example. Any relevant examples are also accepted if valid. JULY2013_ (D5) 4/5

5 Question 4 Learning Outcome 4 Explain the following terms in the context of improving supplier relationships: i) Vendor rating ii) Supplier appraisal iii) Supplier development iv) Relationship assessment (25marks) This part of the question is designed to test candidates understanding of the process of supplier performance measurement, exploring the formulation of performance measures and standards (including key performance indicators or KPIs) for suppliers; methods of monitoring, reviewing and evaluating supplier performance; particularly techniques including benchmarking and scorecards. Pass grade answers are likely to include the following content: i. Vendor rating - is the post-contract activity designed to measure the supplier s performance. The aim is to provide an objective assessment using measures agreed with the supplier either as part of the contract terms and conditions or as part of an on-going exercise in performance improvement through the use of SLA s or KPI s. Marks are awarded to candidates who mentioned the vendor rating criteria as well as those mentioning KPIs and SLAs. Possible examples could include: price, quality, delivery, etc. ii. Supplier appraisal - is the pre-contract assessment of a potential suppliers capabilities in regard to quality, capacity, capability, cost and a range of other factors relevant to the client organisation. The aim of the appraisal is to predict the performance of the supplier and to identify and reduce risk in dealing with that supplier. iii. Supplier Development - is defined as: The provision of finance, technology and other forms of assistance to enable the supplier to offer a product or a service which meets the buyers needs, or to interface with the buying organisation in an appropriate way. Development could involve the provision of finance, expertise, technology, plant and equipment or access to supply sources etc.. iv. Relationship assessment supplier preferencing matrix, Kraljic s relationship matrix or purchasing portfolio matrix to be discussed adequately for a full mark to be given see page 177 to 179 of the official CIPS course book. Relationship assessment can be defined as a process that can be applied by purchasers and suppliers to evaluate or score different aspects associated with their relationship. There are various methodologies for relationship assessment. Candidates may refer to the purchaser-supplier satisfaction model. This attempts to map both the buyers and the supplier s view of the relationship from multiple points in both organisations i.e. the Johari window is a classic example. 2 marks for definition, 2 marks for description, 3 marks for impact on relationships. JULY2013_ (D5) 5/5