Advanced Diploma in Purchasing and Supply

Transcription

1 Advanced Diploma in Purchasing and Supply Risk Management and Supply Chain Vulnerability LEVEL 5 L5-02/Nov07 DATE: Tuesday 20 November 2007 TIME: to DURATION: 3 hours Instructions for Candidates: This examination is in TWO sections. Section A Has TWO compulsory questions, worth 25 marks each. Section B Has FOUR questions; answer TWO. Each question is worth 25 marks. 1. Do not open this question paper until instructed by the invigilator. 2. All answers must be written in the answer booklet provided. 3. All rough work and notes should also be written in the answer booklet. QP - 01

2 SECTION A You are strongly advised to carefully read and analyse the information in the case study before attempting to answer questions 1 and 2. ON TRACK FOR ALIGNMENT Background and Market conditions Eurorail is a European rail transport provider which has secured several long-term rail transportation agreements with state governments. The business sector, however, is seen as extremely volatile in terms of capability, quality and reliability of specialist organisations required to support Eurorail. Accordingly, Eurorail is very wary of the vulnerability that can transpire if the wrong choice of contractual arrangement is made. Casey-Jones Rail Carriage Maintenance Ltd (Casey Jones) is Eurorail s existing specialist contractor for repair and maintenance of its carriages. Casey Jones is regarded as a crucial service provider to Eurorail and is one of only two organisations licensed to service train carriages across Europe. The alternative provider to Casey Jones currently has no available capacity to accommodate new clients. Eurorail s existing one year contract with Casey Jones is due to expire and competitor intelligence suggests that other rival independent rail transport providers are seeking to build a market position. It s also rumoured that competitors have been making tentative enquiries to Casey Jones regarding possible future use of its specialist services. Key immediate risks for Eurorail relate to: losing continued access to a key service provider (Casey Jones) the terms and service level which might apply under any new deal negotiated with Casey Jones, once the existing contract expires Casey Jones apparent preference for short-term contractual arrangements. Mindful of the vulnerability that these risks present, Eurorail s managing director (MD) has been researching similarities that exist in other industry sectors and how such risks were reduced. His findings suggest that in situations where competition amongst clients is fierce to secure the services of contractors, which are in short supply, longerterm alliance deals might be appropriate. He recognises, however, that Eurorail s procurement staff lack knowledge and understanding of the following areas, diagrammatically illustrated in Figures 1 and 2 (Kraljic): where alliance contractual relationships are more appropriate (for example, dependent on the level of criticality/risk to the organisation and the volume of procurement spend). Eurorail s position within the supply chain with regard to reliance on key contractors such as Casey Jones. Casey Jones s perspective (the contractor) and how Eurorail (the client) might differentiate itself as a more attractive client compared to its emerging rival peer group. 2

3 High Fig 1 Eurorail Perspective High Fig 2 Casey Jones Perspective Critical contractor for client Attractive client to contractor Criticality/ Risk Client Attractiveness Noncritical services Nuisance client to contractor Low Spend High Low Revenue High Eurorail s MD also found in his research that contractors valued clients that were: profitable, offered continuity of work, offered favourable contract and payment terms (including on time payments). Other influencing features were clients that were easy to work with and which were receptive to innovation. The prestige associated with working with a large organisation was also noted. Additionally, he also established that key performance indictors (KPIs) were a possible means of achieving alignment between two potential parties to an alliance. KPIs are a crucial feature of most modern contracts which are frequently ignored at the outset. They capture what is important to the client in terms of its desired outcome from a contract. A contractor s view of the level of importance of a KPI often differs from the client s view. This lack of alignment early on can result in problems for both organisations as a contract progresses. Identification and comparison of potential serious areas of misalignment can provide a meaningful basis for the two parties to the potential contract to discuss and close the gaps at the pre-contract stage. This is vital when considering any long-term contractual arrangement. The measure of the level of importance for each KPI can be quantified or captured on a simple scale of 0 to 5 (where 5 indicates the highest importance and 0 the least). This information is obtained through discussions with key stakeholders well in advance of developing or awarding any contract. Each KPI measurement can then be recorded in a table format as shown in Figure 3 below. Figure 3 KPI Perceptions of Potential Parties to an Alliance KPI Eurorail perspective Score (0-5) Casey Jones perspective Score (0-5) Alignment gap to close Final cost Quality of service Communication Delivery and reliability Health, safety and environment Contingency planning Innovation Available capacity and resources Corporate and social responsibility Note: Level of importance of specific KPIs is indicated by a score with 0 being the least important with 5 being the highest importance. The difference in scores from the two organisations is shown on the right hand column. 3

4 The Challenge You have been appointed as an independent business improvement consultant to: 1. Help educate procurement staff within Eurorail on preconditions necessary to merit developing an alliance. 2. Facilitate a meeting between the senior management teams from Eurorail and Casey Jones to enable both parties to understand each other s key drivers should they develop a longer term alliance. The challenge is to identify potential gaps and guide both parties closer to alignment, such that they would have a solid basis for an alliance. The information in this case study is purely fictitious and has been prepared for assessment purposes only. Any resemblance to any organisation or person is purely coincidental. QUESTIONS Questions 1 and 2 relate to the case study and should be answered in the context of the information provided. Assuming the role of the independent business improvement consultant answer the following questions: Q1 (a) Explain the preconditions which should exist prior to Eurorail developing a long-term alliance with Casey Jones, referring to Figures 1 and 2. (10 marks) (b) Discuss the benefits and risks from the perspectives of both Eurorail and Casey Jones of entering into a long-term alliance, (referring to Figures 1 and 2). (15 marks) Q2 Explain how the KPI alignment concept (Figure 3) may be used to obtain crossorganisational alignment and mitigate risk prior to Eurorail and Casey Jones finalising their potential long-term alliance. (25 marks) 4

5 SECTION B Answer TWO questions from section B. You are strongly advised to carefully read all the questions in section B before selecting TWO questions to answer. Q3 (a) Discuss how insurances can be used in the context of contract liability and indemnity provisions to reduce risk. (10 marks) (b) Appraise THREE types of insurance, one of which must be self-insurance. (15 marks) Q4 Evaluate the risk exposure to both parties when entering into exclusive negotiations. (25 marks) Q5 Explain how effective risk management can benefit an organisation by reducing uncertainty. (25 marks) Q6 Explain how an organisation with which you are familiar might use competitive intelligence to optimise its position with regard to supply chain vulnerability and risk. (25 marks) END OF QUESTION PAPER 5

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