Foundation Diploma in Purchasing and Supply Effective Negotiation in Purchasing & Supply L4-01 Level 4 Senior Assessor s Report November 2008 L4-01 SA report/nov 2008 1
INFORMATION FOR CANDIDATES The senior assessor s report is written in order to provide candidates with feedback relating to the examination. It is designed as a tool for candidates for both those who have sat the examination and those who wish to use it as part of their revision for future examinations. Candidates are advised to refer to the Examination Techniques Guide (see the following link http://www.cips.org/documents/examinationtechniquesguidefeb07.pdf) as well as this senior assessor s report. The senior assessor s report aims to provide the following information: An indication of how to approach the examination question An indication of the points the answer should include and how marks are allocated An indication of candidate performance for the examination question APPENDIX A matrix for the examination is included as an appendix. It highlights the learning objectives of the unit content that each question is testing. The unit content guides are available to download at the following link: http://www.cips.org/studyandqualify/cipsqualifications/awardscontent/default.aspx ADDITIONAL SOURCES OF INFORMATION The Supply Management magazine is a useful source of information and candidates are advised to include it in their reading during their study. Please see the following link to the Supply Management website http://www.supplymanagement.com/ L4-01 SA report/nov 2008 2
SECTION A Question 1 (a) (10 marks) Calculate CCD s break-even point in units and s. This question required candidates to calculate the break-even point from the table in the case study. It was expected that candidates would use the following formula: Break-even point = Fixed Costs divided by Selling Price minus Variable Cost per unit. This translates to: 500,000 (150 50) which equals 5000 units. At a selling price of 150 per Unit, 5000 units would give a break-even point in Sales Revenue at 750,000. Some candidates, who did not use the formula, calculated the correct figures by using a chart in part (b). 5 marks were available for each of the two correct answers. A number of candidates achieved full marks for this question but many failed to gain any marks by not providing both answers or by over-complicating the calculation. Question 1 (b) (5 marks) Illustrate your findings for Q1 (a) using an appropriate chart. A potential 5 marks could be gained for a chart that was correctly labelled. Fixed, variable and total costs should have been shown, together with sales revenue and the break-even point, with Cost and Quantity on the two axes; profit and loss areas could be labelled. Answers which provided an incomplete diagram failed to gain high marks however no additional discussion was necessary in order to achieve the full 5 marks. A well-drawn chart would have assisted in calculating the answer to part (a). Question 1 (c) (10 marks) Explain CCD s perspective of break-even. The focus of this question was the supplier s perspective on break-even which is specifically mentioned in Learning Objective 2.4. Many candidates explained that a loss would be made below break-even and a profit made above break-even; this was insufficient to gain many marks. Good answers should typically recognise that break-even is usually the minimum desirable outcome and that CCD needs to make a contribution to fixed costs. CCD will not be willing to sell at less than cost unless there is a good reason. CCD may be more L4-01 SA report/nov 2008 3
flexible on price above break-even. CCD may sell at marginal cost, but may not be happy to sustain this. Higher selling prices would achieve break-even more quickly as will lower costs. Higher short term prices will lead to break-even earlier and could allow discounts later. For all 10 marks, answers were typically expected to address three of these (aspects or similar) from the CCD s perspective with a clear explanation. Few candidates provided satisfactory answers to this question, with little recognition of the impact on break-even of reducing costs or increasing volumes. Question 2 (a) (5 marks) Describe which statutory protection could be used by Hitesh in order to replace DC s chairs. This question expected candidates to recognise that Hitesh could use the Sale of Goods Act 1979 or possibly the Sale and Supply of Goods Act 1994. Several answers mentioned The Consumer Protection Act 1987 but this is inappropriate for Hitesh to use as this Act only applies where the consumer has acquired a defective product which causes damage; a product which does not satisfy or is not fit for purpose is covered by the Sale of Goods Act 1979; discretion was given to answers which included other appropriate, non-uk national legislation. The Supply of Goods and Services Act 1982 would be inappropriate in this case study, as this Act covers transfers other than by outright sale. In order to achieve the full 5 marks, answers should have named the Act and provided a description, typically covering the implied term of fitness for purpose and a remedy for breach, such as replacement or credit. Most answers were awarded high marks for part of the question. Question 2 (b) (5 marks) Define the term Caveat Emptor Caveat emptor is a Latin term meaning let the buyer beware ; this is an underlying principle of all business. In order to gain 5 marks, answers were expected to give this definition and then explain that a buyer needs to apply due diligence to his/her transactions and cannot rely on the Courts to protect him/her from his/her own errors. The Courts assumes that a person in a position of authority will be trained and should therefore behave appropriately, using care and attention, when making financial commitments. A bad agreement is still an agreement and the buyer will usually be legally obliged to carry out his/her obligations. There is an increasing amount of statutory protection, implying a range of minimum performance criteria into the contract, not least the Sale of Goods Act, the Health & Safety at Work Act etc. These statutes do state the seller s minimum L4-01 SA report/nov 2008 4
obligations and this does usually reduce the risks for the buyer, though much of this legislation is designed to protect members of the public, rather than corporate buyers. Question 2 (c) (15 Marks) Describe FIVE ways in which Hitesh could improve the negotiation capabilities of the existing procurement team. Candidates should recognise the procurement team comprises three purchasing clerks and answers should be formed accordingly. Better answers included a number of ways of improving capability, not just variations of training. Training is certainly acceptable as one of the ways, but others could have included sharing knowledge, job rotation, mentoring, e-learning, rehearsal and knowledge gathering. For each of the five elements mentioned, answers should have demonstrated how they could be carried out and how they could improve capabilities. Weaker answers omitted the need for formal and informal training; some did mention training but gave no details of how this could be carried out. There were up to 3 marks for each appropriate way described, with 1 mark for naming each method, 1 mark for explanation and 1 mark for clarifying how it could improve negotiation capability. Answers that simply listed a number of negotiation elements that the staff should know about, gained few marks. SECTION B Question 3 (a) (10 Marks) Discuss the difference between direct and indirect costs and describe how this information can be used during a negotiation, using relevant examples. Marks were achieved by candidates who were able to explain direct and indirect costs, with examples that clearly highlighted the difference between the two. Direct costs are those that are directly attributable to a product, process or service. Indirect costs are those usually included in the general overhead, as they are not easily attributable to any specific activity. Most answers included an example such as the answer booklet, where the direct costs would include the paper, ink etc, whilst the indirect costs would be encompassed by a number of general overhead items such as administration staff salaries. Higher marks were gained by giving a clear explanation as to how knowledge of these costs could contribute to an effective negotiation. It was expected that candidates would consider activity based costing, such as is currently operated by budget airlines. The costs of luggage, refreshments and check-in desks can be directly attributed to customers, therefore with some airlines; customers only pay for the services used. Similarly, a buyer L4-01 SA report/nov 2008 5
which pays on time, causes no delivery problems and is generally a good customer, should be negotiating to ensure that the costs of late payments, slow off-loading and other overhead costs are charged to the customers who cause them and are not included in the general overhead. An astute buyer will assess the direct costs to calculate which elements can be reduced or removed, such as through the use of less packaging, multilingual labels, easier handling etc. This question was well answered and most of the answers were awarded a pass grade or higher, though there was some confusion between direct/indirect costs and fixed/variable costs. Question 3 (b) (5 Marks) Discuss TWO advantages of standard costing. Few candidates demonstrated an understanding of the principle of standard costing. It is referred to briefly in Lysons and Farrington, but a better reference is Frank Wood s Business Accounting 2, which is also a good source of information on all aspects of costing. Standard costing uses standards of performance and of prices derived from studying operations and of estimating future prices. In other words, by using existing knowledge of the cost components of a product or raw material, the likely price of that product over the next financial year, can be predicted. Standard costing is the name given to the process of averaging out the price of that product over the forthcoming financial period, so that it can be charged out to internal users at a standard rate. It has nothing to do with suppliers; it is purely an internal tool to assist cost and budgetary management. By having standard prices for the main items purchased, the actual purchase price against standard price can be measured and the variance investigated; this is sometimes called the Purchase Price Variance or PPV. If raw materials or tools are bought that go into stock, the user departments will be charged the standard price rather than a price that has to be calculated each time there is an issue from stores. The benefits of using a standard costing mechanism could include any two from the following list, with some additional explanation to support the choices and gain the 5 marks available: a. improved management control b. encourages detailed budgeting c. gives faster reporting and early warning signals via variances d. simpler than actual costing e. harmonises costs over the period f. better means of checking efficiency L4-01 SA report/nov 2008 6
Question 3 (c) (10 Marks) Explain how understanding an internal customer s budget can assist with negotiations. In order to achieve the 10 marks, answers to this question were required to include at least three ways in which knowledge of an internal customer s budget would assist the buyer in negotiations. Answers needed to include substantial explanations with justifications. If a greater number of benefits were offered then a reduced explanation would have been acceptable; bulleted lists did not gain high marks. Candidates could have selected such areas as trust and rapport, improved preparation for negotiation in identifying variables, establishing the fall-back or BATNA, recognising objectives, creating buy-in or similar elements. This was not a popular question and high marks were rare for part (c). Question 4 (a) (15 marks) Discuss FIVE difficulties affecting telephone negotiation. This was a very popular question attempted by almost all of the candidates and the majority gained a pass mark or higher, through identifying five appropriate difficulties. The command word was discuss which means to consider something by writing about it from different points of view. 3 marks could be achieved for each of the five different difficulties discussed. Most answers discussed: lack of body language clues difficulty of controlling the discussion does not build rapport as well as face to face lack of language cues difficulty of taking the initiative on closing the conversation noise issues (communication model) lack of visual feedback Better answers offered some better discussion of how to use language effectively when negotiating on the telephone, such as the identification of tone and emotion, rate of speech and preferred language (direct/indirect) as well as devices for checking understanding. Techniques for eliciting information and agreement on the telephone such as open and tag questions could also suggested by good answers. Opportunities should be taken to carry out the negotiation when the buyer is better prepared, having ensured a quiet room with minimal distraction and better line quality. Supporting documents can be made available by email/fax and the use of web-cams and interactive communications would have been acceptable solutions for some of the difficulties. L4-01 SA report/nov 2008 7
Question 4 (b) (10 marks) Describe TWO question types that can be used to seek information, and give an example of each. This was generally well answered with most candidates able to identify, explain and offer an example of two types of question from the many available. Answers could have included two descriptions from the following options: Open cannot be answered with a yes or no. Typically take the who, what, when, where, why, how forms Heated high emotion (good answers might note that this type is difficult to manage in a negotiation situation) Leading encourages the desired answer Cool has low emotional content Directive straight to the point Treat incorporates some form of flattery Closed not a particularly effective but is recognised as a type of question that can be used. Planned one negotiator has previously prepared on a specific point, perhaps as part of a sequence Window seeks an insight into the other s perspective Other types of questions are mentioned in various sources such as Kennedy s Essential Negotiation or It s a Deal by Steele et al. and all reasonable answers were awarded appropriate marks, providing the explanation demonstrated clear evidence of understanding. In order to achieve the full 5 marks, candidates could have included a valid question type, an explanation, an example and some additional discussion concerning weaknesses, benefits, counter-measures, appropriateness or similar. Failure to provide an example would result in a maximum 3 marks, per type of question. Giving more than two types of question did not increase the marks achieved as only the first two could be marked. Many candidates appeared to misunderstand the question and gave irrelevant or inappropriate answers. Question 5 (a) (10 marks) Describe TWO opportunities for conditioning a supplier that could be used prior to a negotiation. Conditioning is concerned with behavioural science, linking back to Pavlov s experiments with dogs. Candidates might also read Eric Berne s Games People Play to recognise that specific behaviour will usually stimulate specific responses. In business, conditioning might also be called softening up. The simplest form of conditioning is being polite, courteous, friendly and professional to make the other party likes and respects you. Any behaviour that indicates these characteristics, such as L4-01 SA report/nov 2008 8
punctuality, being prepared, giving up valuable time, providing refreshments etc. would contribute to an acceptable answer. By sharing information with the supplier, a supplier may be conditioned to be more open with information. Alternatively, an aggressive approach will usually stimulate an aggressive response. Allowing the supplier to become aware of the limits to which a company is prepared to accept, sometimes conditions the supplier into producing a proposal within those limits. Other conditioning behaviour includes the indication of maximum budgets, the revelation of information by other internal stakeholders, the recognition that there are alternative suppliers and even emotion, if carefully used. Some organisations condition their suppliers positively or negatively with public announcements or with well structured or poorly structured Invitations to Tender. Better answers recognised that conditioning can lead to both positive and negative outcomes. Many candidates only offered one method of conditioning but then repeated it. Other candidates seemed to confuse conditioning with supplier appraisal. Most seemed to be aware of the Supplier Perceptions Matrix but did not seem to recognise how this can assist in identifying which suppliers need conditioning prior to negotiation. Question 5 (b) (15 marks) Explain how room layout/surroundings can impact upon a negotiation. This question sought a clear statement of a number of elements that could be considered when arranging room layout and surroundings, for a negotiation and how these could impact on a negotiation. Many candidates only suggested one or two relevant issues such as seating arrangements, tidiness, access to information, tone (adversarial or collaborative), lighting, size, numbers, comfort and refreshments. Several candidates mentioned irrelevant issues like SWOT and PESTEL for which no marks were gained. Better answers made reference to why such issues are important and how they could impact on negotiations. Question 6 (25 marks) Discuss FIVE types of analysis that can be undertaken prior to a negotiation. This was an opportunity for candidates to demonstrate to the assessor, their understanding of various analytical tools with relevance to negotiations. Most candidates satisfactorily described and explained five of the available tools. The most popular were Porter s Five Forces, break-even analysis, cost analysis, market analysis, PESTEL, SWOT, benchmarking and financial analysis. L4-01 SA report/nov 2008 9
There was potential to achieve 25 marks for this question; in order to do this, candidates were required to describe and explain the analytical tools, preferably with well-labelled drawings where appropriate. Three marks were available for each form of analysis that was fully explained. Two marks could be gained by expanding the answers to explain how each type of analysis could contribute to a forthcoming negotiation. An example might be: by better understanding the factors within the business environment (PESTEL), clauses can be identified that could be negotiated into the contract, to reduce the areas of risk that the analysis has indicated. Examples of negotiable areas include the use of our own legislation, fixed prices, force majeure clauses (in case of changes in political or legal arrangements) and many more. Most candidates drew excellent diagrams but some did not offer any explanation and did not relate it to negotiations. It is not enough to describe the model; candidates need to explain how to apply each model or analysis type in different situations and be able to give clear evidence of their understanding of the value of the analysis. General Comments It was expected that, as part of their discussions, explanations and justifications, candidates would not only highlight the problems incurred in different elements of negotiation, but also suggest remedies or preventative measures. Many candidates tried to apply a formulaic answer to several of the questions thus failing to achieve high marks. It was also clear that many candidates are not focussing on the learning objectives within the unit content; nor are they ensuring that they are able to offer clear evidence that they understand and can apply those unit content elements. Answers on conditioning, supplier s perspective and standard costing together with the mathematical questions in Section A, highlighted areas that some candidates need to focus and improve on. There was evidence of detailed study in many key areas including the tools of analysis, but few were able to show how these can generate information that will be of use to a negotiator. Candidates should be encouraged to write answers that are appropriate in substance and length, considering the number of marks available. It is unlikely, for example, that a 50-100 word answer will gain a pass grade for a 15 mark question. Many gave answers that were too brief and lacking in appropriate detail, revision of general examination techniques could assist candidates in achieving higher marks in future examinations. L4-01 SA report/nov 2008 10
APPENDIX: Matrix indicating the learning objectives of the unit content that each question is testing. SECTION A SECTION B Question No. 1 2 3 4 5 6 Learning Objective a b c a b c a b c a b a b 1 Preparing for negotiations in different settings 1.1 X 1.2 1.3 1.4 1.5 X X 1.6 2 Financial tools for negotiations 2.1 2.2 X X X 2.3 2.4 X X X 2.5 3 The negotiation process 3.1 3.2 X X 3.3 3.4 3.5 4 Effective behaviour for negotiation 4.1 4.2 X 4.3 X 4.4 4.5 X 4.6 4.7 L4-01 SA report/nov 2008 11