Scope and Influence of Procurement and Supply L4M1 Exam Questions

The question is asking you to explain the following:

The objective of negotiation with a supplier is to ensure the Five Rights of Procurement. Which of the following are part of the Five Rights? Select THREE.

- With this type of question you would be expected to discuss 3- 5 differences, giving examples.

Example Essay Structure

Introduction – explain what is meant by ‘procurement’ and ‘SCM’ – procurement is the traditional

way and is to do with purchasing goods, SCM is the new way which is a more multifaceted way of

securing goods and is the result of longer, more complex and more globalised supply chains.

Paragraph 1 – the objectives of each approach (5 Rights vs added value)

Paragraph 2 – the approach (reactive buying vs proactive ordering)

Paragraph 3 - the way of working (silo working vs cross-functional working)

Paragraph 4 – the relationships with suppliers(transactional vs collaborative)

Conclusion – There are many differences between the two approaches, and different companies may

favour one over the other depending on their specific circumstances. E.g. small organisations that

make low value and low risk purchases may take a traditional procurement approach and large multinational organisations may require a SRM approach due to the volume of suppliers and com-plexities

of the supply chains.

Example essay:

Procurement and Supply Chain Management (SCM) represent two distinct approaches to acquiring

goods, reflecting the evolution of purchasing practices. Procurement, the traditional method, involvesthe straightforward purchase of goods. In contrast, SCM is a more intricate approach, born out

of longer, more complex, and globalized supply chains. This essay explores the main differences

between these two approaches, highlighting their objectives, methods, ways of working, and supplier relationships.

In the traditional procurement approach, the focus is on achieving the "5 Rights" – getting the right

goods, in the right quantity, at the right quality, for the right price, and at the right time. This ensures efficiency in the purchasing process. On the other hand, SCM goes beyond these basic objectives, aiming to add value to the entire supply chain. This might involve developing strategic relationships with suppliers, ensuring sustainability, and aligning with broader organizational goals. For

example, a company employing a traditional procurement approach might emphasize getting the

lowest price, while an SCM approach could involve working with suppliers to enhance product innovation or reduce environmental impact.

Secondly, the traditional procurement approach is often reactive, responding to immediate needs or

demands. Companies using this method typically make purchases as required, without a long-term

strategy. In contrast, SCM involves proactive ordering, anticipating future needs and trends. For

instance, a company employing SCM might engage in demand forecasting, allowing for better planning and inventory management. This proactive approach helps preventstockouts, reduce costs, and

enhance overall supply chain efficiency.

Moreover, traditional procurement often involvessilo working, where different departments operate

independently. The procurement team may not collaborate closely with other departments like production or marketing. In SCM, there's an emphasis on cross-functional working, breaking down departmental barriers for a more integrated approach. For example, an SCM team might work closely

with production to ensure materials are aligned with manufacturing schedules, fostering efficiency

and minimizing disruptions.

Lastly, in traditional procurement, the relationship with suppliers is transactional – focused solely on

the exchange of goods for money. Conversely, SCM promotes collaborative relationships, emphasizing long-term partnerships. A company using SCM might work closely with suppliers to improve

processes, share information, and jointly address challenges. For instance, an SCM approach might

involve collaborating with suppliers to implement just-in-time inventory systems, leading to cost

savings and improved responsiveness.

In conclusion, the differences between traditional procurement and SCM are substantial and nuanced. While a traditional procurement approach may suit smaller organizations with low-value and

low-risk purchases, larger multinational companies with complex supply chains often find SCM more

suitable. Understanding these differences allows companies to tailor their approach based on their

unique circumstances, emphasizing the importance of flexibility and strategic alignment with

organizational goals in the ever-evolving landscape of buying and supply chain management.

Tutor Notes

- This question is taken from learning outcome 1.1.1 (p2 onwards). The new study guide has drastically simplified the information on this topic compared to the old syllabus (the table above comes

from the old syllabus). This may be good news for students in that you don’t need to know as much,

but I do wonder if the study guide gives students enough ‘content’ to write an essay on the subject.

- If a question is to come up from LO 1.1 it would be likely be something like: definitions and differences

between procurement and SCM, difference between a supply chain and a supply network, elements of SCM, or how to add value in the supply chain.  

What to include in the essay:

- Definition of added value: the economic enhancement given to products orservices before offering

them to customers. Examples may include a product which has additional features at no additional

cost to the customer or the provision of an extended warrantee.

- Description of four of the following with examples and s: providing better customer service levels,

risk management, cost control and reduction, relationship management, reputation management,

innovation, use of technology, streamlining processes, improving specifications, increasing

sustainability, improving quality, ordering processes such as bulk ordering, inventory management,

improving the product from the customer’s perspective (e.g. packaging, exclusivity), sustainability,

convenience, market development.

Example essay:

Added value in procurement refers to the enhancement or improvement in the economic worth,

quality, or utility of products or services before they are offered to customers or end-users. In the

context of procurement, the goal is to go beyond simply obtaining goods or services at the lowest

cost. Instead, procurement aimsto contribute additional value to the organization through various

means. This essay explores the concept of added value and outlines four ways the Procurement

Department can contribute to organizational improvement.

Improving Specifications

Procurement can add value firstly by ensuring all critical items are procured against a specification,

and secondly by improving and regularly updating those specifications. For example, the

procurement department might be responsible for procuring light-bulbs for an office. Having an

effective specification for this purchase (lightbulbs must meet X safety standard and Y environmental

standard) would result in less maverick buying for the organisation and the procurement of a betterquality product. Furthermore, regularly updating specifications ensures that purchases are made

against current safety standards and regulations (e.g. the use of low-energy lightbulbs). If

procurement don’t update specifications, then there is a risk that items are bought that don’t meet

the correct standards. Added value in this regard could also therefore be considered the removal of

risks of procuring the wrong item.

Stream-lining Processes

Procurement can add value by stream-lining processessuch as requisitions and POs. Thisreduces the

time it takes to procure an item, thus saving the company money. Another process that could be

streamlined is the re-ordering process of regularly bought items. This could be automated when the

stock levels reach a certain level. For example if an organisation requires its staff to wear PPE, an

automatic request could be made once there are only 50 face masks left.

Managing Supplier Relationships

Having strong, positive relationships with suppliers is a source of added value as it means suppliers

value you as a buyer and are therefore more likely to help in situations which are adversely affecting

business. For example, if a manufacturer puts an order in for 300 items with their supplier but then

realises that they have made an error in the amount, if there is a strong relationship, the supplier

may allow the buyer to amend the order after the fact. If there is a poor relationship, the supplier

may not be as flexible. The flexibility in the supply chain is therefore a source of added value.

Improving Quality / Innovation

Thisinvolves adding value from the customer’s perspective. E.g. a customer may choose to purchase

a phone that has a longer battery life than others. Procurement’s role in this may be in completing a

Value Engineering exercise or procuring higher quality components or materials at the same price in

order to achieve this additional feature.

In conclusion, the Procurement Department plays a crucial role in organizational success by adding

value through improved specifications, streamlined processes, strong supplier relationships, and a

focus on quality and innovation. These strategies contribute to enhanced efficiency, reduced risks,

and increased customer satisfaction, making procurement an essential function for organizational

excellence.

Tutor Notes

- The question asks specifically to name 4 ways of adding value. You therefore won’t get any

additional points if you talk about 5 or 6, even though it may be tempting. Instead, focus your

response on providing more information on the 4 you have chosen and bulking out your answer with

examples. This demonstrates to the examiner that you fully understand the topic AND that you can

apply the theory to real situations.

- You could use real-life examples from your own organisation/ experience or you could give a

hypothetical situation such as a cake manufacturer. You could talk through how the procurement

department at the cake manufacturer can add value by doing the four things in your essay: by

amending the specification so the cakes are more tasty, by streamlining the process for ordering

flour, by managing the relationship with the company that fixes the machines when they break

down, and by introducing innovation such as using an e-procurement system to source raw materials

and the benefits that these will bring to the organisation.

- Added value is part of the syllabus for Learning Outcome 1.2 starting from p.19 but I’m gonna be

honest, I think the new study guide is a bit crap on this part of the syllabus. The section starts talking

about the 5 rights of procurement and I think that makes things very confusing for students. The 5

rights and added value are linked subjects, but they’re not the same. Getting the rights right, CAN

lead to sources of added value, but added value is value that is IN ADDITION to what is expected. So,

when you have a question on added value, focus on stuff that’s listed under 1.1.4 ‘other sources of

added value’ on p.35 rather than talking about the 5 rights of procurement. My list at the top is more

exhaustive than the one in the study guide.

- If you’re looking to be really clever you can quote Michael Porter on ‘what is added value?’. Michael

Porter looks at this from a customer perspective - ‘added value’ refers to the addition of greater

value (either by reducing the cost to produce it, or by adding something that customers are willing to

pay more for). These could be; marketing / design, customer service, maintenance, delivery etc. This

comes up at Level 5 / 6.

1) A definition of Value for Money: ensuring a purchase is cost effective. This may be that the purchase achieves the 5 Rights of Procurement or that the purchase achievesthe 4Es: Economy, Efficiency, Effectiveness and Equity. – thisis only worth 5 points, so don’tspend too long on this 2) 4 techniques Bob can use to achieve VFM: this is the bulk of your essay. Each of the 4 will be worth 5 points, so remember to give a thorough and example. Pick 4 from the list below: complete a value analysis to eliminate non-essential features, minimise variety/ consolidate demand, avoid over specification, pro-active sourcing, whole life costing methodologies, eliminate / reduce inventory, use electronic systems, international sourcing, sustainability / environmental policies, currency/ exchange rate considerations, negotiating good payment terms, packaging, warrantees. Example Essay: "Value for money" (VFM) is a concept that refers to obtaining the best possible return on investment or benefits relative to the cost incurred. It involves assessing whether the goods, services, or activities provided offer an optimal balance between their cost and the quality, benefits, or outcomes they deliver. Value for money is not solely about choosing the cheapest option; instead, it considers the overall efficiency, effectiveness, and long-term value derived from an expenditure. For Bob, the Procurement Manager at ABC Ltd there are four key ways that he can achieve this for all future purchases. Value Engineering This is looking at the components of a product and evaluating the value of each component individually. You can then eliminate any components that do not add value to the end product. To do this Bob would choose a product to review and determine whether any parts of this can be omitted (thus saving the company money) or could be replaced by components that are of a higher quality at the same price (thus providing added value to the customer). For example, Bob could complete aValue Engineering exercise on the new mobile phone prototype ABC plan to release next year. His findings may discover a way to provide a higher quality camera at no additional cost or that some components don’t add value and can be eliminated. Consolidate demand Bob can achieve value for money by consolidating demand at ABC ltd. This would mean rather than each individual person/ department ordering what they want when they need it, Bob creates a centralised process for ordering items in bulk for the departments to share. For example, if each department require stationary to be ordered, Bob can consolidate this demand and create one big order each quarter. This will likely result in cost savings for ABC as suppliers often offer discounts for large orders. Moreover, consolidating demand will allow forsaving in time (one person does the task once, rather than lots of people doing the same task and duplicating work). Internationalsourcing Bob may find there is value for money in changing suppliers and looking at international sourcing. Often other countries outside of the UK can offer the same products at a lower cost. An example of this is manufactured goods from Chin a. By looking at international supply chains, Bob may be able to make cost-savings for ABC. He should be sure that when using this technique there is no compromise on quality. Whole Life Costing methodology This is a technique Bob can use for procuring capital expenditure items for ABC. This involves looking at the costs of the item throughout its lifecycle and not just the initial purchase price. For example, if Bob needs to buy a new delivery truck he should consider not only the price of the truck, but also the costs of insurance for the truck, how expensive it is to buy replacement parts such as tyres and the cost of disposing of the truck once it reaches the end of its life. By considering these factors Bob will ensure that he buys the truck that represents the best value for money long term. In conclusion Bob should ensure he uses these four techniques for all items he and his team procures in the future. This will ensure ABC Ltd are always achieving value for money, and thus remain competitive in the marketplace. Tutor Notes - This case study is really short, and the ones you’ll receive in the exam are often longer and give you more guidance on what they’re expecting you to write. With case study questions, you have to make your entire answer about B- A good rule of thumb for case study questions is make sure you reference the case study once per paragraph. - Value for Money is a really broad topic and you can pretty much argue anything that procurement does is helping to achieve value for money. There’s a large table of stuff that’s considered VFM on p.38 but that table isn’t exhaustive. So feel free to come up with your own ideas for this type of essay. Some additional tidbits of information on VFM: - The ‘academic’ definition of Value for Money is ‘the optimum combination of whole life cost and the quality necessary to meet the customer’s requirement’ - Value for Money is an important strategic objective for most organisations but particularly in the public sector. This is because the public sector is financed by public money (taxes), so they must demonstrate that the organisation is using this money wisely. This might be an interesting fact to put into an essay on VFM. - Value can often be hard to quantify, particularly in the service industry. E.g. in customer service it can be difficult to quantify the value of having knowledgeable and polite employees delivering the service.

How to approach this question.

- There's many aspects to this question -- make sure you're answering them all:

- Explain what added value is and explain what 'ensuring processes are compliant' means (this could be your introduction) Added Value = achieving more for the same money. May be in producing an item cheaper, or by procuring additional features at no additional cost. Requires innovation and creativity. The focus is on the outcome. Compliant Processes -- this is focusing on the process, rather than the outcome. Ensuring that purchases are made in line with internal and external rules/ procedures. This may be following Standard Operating Procedures, purchasing to strict budgets and the exclusive use of e-procurement tools.

- Explain the consequences of focusing on added value over compliance; can result in maverick spending, less visibility for management, may have additional risks if procuring items without following procedures -- this may have legal and financial repercussions, Time-consuming, May lead to added expenses

- Consequences of focusing on compliance over added value; May foster a silo-mentality, Misses out on flexibility and agility, misses out on collaborative whole life costs reductions, Procurement function becomes rigid, inflexible and inwardly focused

- How both can be achieved; 1) Seek to add value only for certain purchases such as capital-expenditure items and not for others such as stationary.2) Ensure time is well-spent i.e. focus on added value for purchases where this can be most achieved, and focus on compliance where there is high risks. 3) Review processes regularly to ensure both goals are being achieved 4) Complete 'lessons learned' activities after big procurement activities to advise on future procurement activities- were both Added Value and Compliance achieved? How could this be improved next time?

- these three should form the main body of your essay. Above are many ideas you could explore, you won't have time to talk about all of them so pick a couple that resonate with you

Conclusion -- the balance is important

Example Essay

Added value refers to the extra worth or enhancement a company provides to a product, service, or process that goes beyond the intrinsic value inherent in the initial input. It represents the additional benefits or features that make a product or service more desirable to customers, often justifying a higher price or distinguishing it from competitors. Procurement often look to achieve added value in procurement activities but achieving this whilst remaining compliant (adhering to established laws, regulations, standards, and internal policies) can be tricky. Achieving a delicate equilibrium between pursuing added value and ensuring stringent compliance in procurement activities is pivotal. This essay explores the consequences of emphasizing one area over the other and outlines strategies for organizations to successfully navigate the dual goals of attaining added value and maintaining compliance.

Consequences of Focusing Solely on Added Value:

Prioritizing added value without due consideration for compliance can expose an organization to a myriad of risks. One notable consequence is the potential compromise of regulatory requirements and legal standards. For instance, if a procurement team is solely driven by obtaining cost-effective solutions or innovative products, they may inadvertently overlook compliance with industry-specific regulations, leading to legal ramifications and reputational damage.

Moreover, an exclusive focus on added value may neglect crucial ethical considerations. An organization, in pursuit of cost savings or improved efficiency, might engage with suppliers that violate ethical standards or engage in unethical business practices such as modern day slavery. Such associations can tarnish the organization's reputation, eroding the trust of stakeholders and customers alike.

Consequences of Overemphasizing Compliance:

Conversely, a hyper-focus on compliance without adequate consideration for added value can result in missed opportunities and suboptimal outcomes. Strict adherence to procedural norms and regulations might lead to an overly bureaucratic procurement process, hindering innovation and stifling the organization's ability to adapt swiftly to market changes.

Furthermore, an excessive emphasis on compliance might limit engagement with suppliers, stifling creativity and potential breakthroughs. For instance, a procurement team rigidly adhering to compliance protocols might miss out on collaborating with smaller, innovative suppliers that could offer unique and value-added solutions.

Strategies for Achieving Both Added Value and Compliance:

To navigate the delicate balance between added value and compliance, organizations can adopt several strategic approaches. First and foremost, an organization should establish clear procurement policies and procedures that incorporate both compliance requirements and avenues for seeking added value. This ensures that all procurement activities align with regulatory standards while leaving room for innovation.

Effective supplier management plays a pivotal role in achieving this balance. By thoroughly vetting and categorizing suppliers based on their ability to deliver value and comply with regulations, organizations can strategically align their procurement activities. For example, suppliers that have a proven track record of compliance can be trusted with critical components, while those offering innovative solutions may be engaged for projects that prioritize added value.

Leveraging technology is another essential strategy. Implementing advanced procurement software that integrates compliance checks and offers analytics for value assessment can significantly enhance the efficiency of procurement processes. Automated systems can streamline due diligence, ensuring that suppliers meet compliance standards while providing insights into their potential to deliver added value.

Additionally, fostering a culture of collaboration within the procurement team and across organizational departments is crucial. Encouraging open communication enables different stakeholders to contribute insights on compliance and added value. Cross-functional collaboration ensures that procurement decisions align with broader organizational goals and values.

In conclusion, the strategic balancing act between achieving added value and ensuring compliance in procurement is indispensable for organizational success. By recognizing the consequences of favouring one area over the other and adopting a holistic approach, this safeguards against risks but also positions the organization for sustained growth and competitiveness in the ever-evolving business landscape.

Tutor Notes:

- Examples highlight that you understand the material you have studied and can apply it to real life scenarios. You could take a certain industry or organisation and explain the consequences for them of focusing on one over the other. E.g. In the construction industry it is very important that organisations achieve compliance in their procurement activities. This includes ensuring there are robust contracts in place and that legislation such as CDM and Health and Safety is followed. When procuring a construction contract the danger of focusing on Added Value over compliance is that this may result in key legislation being forgotten which leads to legal proceedings against the buyer. For example, if the buyer procures a construction contract without fulfilling the responsibilities outlined in the CDM and H&S regulations, this can result in huge fines for the company and potential jail time for senior management.

- The risk of focusing on compliance over added value may be in missing out on alternative proposals. For example, if a buyer is procuring a construction project of a new hospital and they focus too much on compliance, they may not engage in Early Supplier Involvement or cross-functional working which may bring up alternative ideas such as different ways the hospital could be built. The alternative ideas may result in higher quality or cost savings which are missed by the buyer. This results in a more costly, or lower-quality hospital being built.

- Overall, what CIPS are testing you on here is that you understand that the procurement department should aim to achieve both -- it's a balancing act between compliance and added value and this could be viewed as a pendulum- it's important not to swing too heavily in one direction. That's actually a really good metaphor -- feel free to use that in your conclusion!

- study guide p. 114